Due diligence

Also called DD

The other side checking that everything you told them is true. Thorough, tiring, and where deals die.

What it means

Due diligence is the investigation an investor or buyer carries out before completing: financial, legal, commercial, technical, and increasingly data protection and employment.

You will be asked for documents you have not thought about in years, and gaps will be found.

Why it matters

Deals fail in diligence more often than in negotiation, and usually not because of anything dramatic. They fail because contracts were never signed, IP was never assigned, employment status was never checked, or the accounts do not reconcile.

Every one of those is fixable in advance and expensive to fix under a deadline.

What it looks like in practice

Prepare before you go to market. Assemble: statutory books and cap table, customer and supplier contracts, employment contracts and consultant agreements, IP assignments, leases, insurance, licences, and three years of accounts with management accounts to date.

Disclose properly. The disclosure letter qualifies the warranties you give — a problem disclosed is a problem you are generally not liable for; the same problem found later is a warranty claim.

What to watch out for

Warranties and indemnities in the final agreement, which is where the risk actually lands. Negotiate caps and time limits.

Diligence findings used to renegotiate price late in the process. Preparation is the defence, along with not granting excessive exclusivity.

Where to get proper advice

A corporate solicitor and an accountant with transaction experience. Start the preparation six to twelve months before you expect to transact.