HM Insights

The due diligence process - Top Tips for businesses seeking investment

As any business which has gone through the due diligence process knows, this can be the most painstaking process of any investment deal.

What is due diligence

Due diligence is the process which is frequently carried out by potential investors in advance of an investment.  Due diligence allows an investor to check that he is buying what he thinks he is buying and that he is paying the right price for it. It also allows an investor to search for actual and potential liabilities that may make the deal commercially unsound.

Due Diligence For Businesses

Why is due diligence important?

The due diligence process is supported by the warranties and indemnities which you would find within the investment agreement and it is the warranties and indemnities which can lead to personal liability for the shareholders and directors of the company.

Although there may be no major issues drawn out during the diligence exercise, it is still important that your business is ready for the process. Frequently issues which are raised during diligence can be rectified, however this can be time consuming and cause delays. It is therefore important for the business to be organised and have its house in order. It is recommended that businesses maintain all information on the business in good order and that it is stored in one place and easily accessible.

Typical areas covered by due diligence

In terms of what documentation the investor will wish to see for the diligence process, this will include:

  • intellectual property registration documentation such as trademarks and patents;
  • corporate structure, company books and share capital; 
  • copies of contracts with suppliers; 
  • assets and real estate; 
  • financial and accounting information; 
  • insurance, consents and compliance; 
  • computer systems and data protection;
  • employment contracts and pensions; and 
  • litigation and disputes.

Documents required for diligence purposes will inevitably vary from deal to deal depending on the business.

Top tips for due diligence

  • know your business;
  • be organised and keep all of your documents together in one place, it is particularly useful to keep an index of documents;
  • save signed versions of contracts where they can be easily accessed;
  • ensure that all documents are correctly signed and dated;
  • provide complete responses to due diligence questions.

Get in touch

If investment is something which you are considering, it is worth discussing this with advisers in order to ascertain whether or not there are any potential gaps in your business which can be addressed prior to any due diligence being carried out.

It is better to deal with any potential issues prior to obtaining investment to ensure that you not only appear professional, but that you also get the best deal for your business.