What due diligence is for
When you buy a business, you are buying its history as well as its future. Due diligence is the process of examining that history — the contracts, the debts, the disputes, the people, the compliance — before you are bound to pay for it. Its purpose is not to find a reason to walk away; it is to make sure the price you agreed reflects the business that actually exists.
Diligence has three strands. Commercial diligence asks whether the business will keep earning: customers, margins, concentration, market. Financial diligence checks the numbers behind the accounts. Legal diligence checks the framework the business runs within — and it is the strand that produces the documents you will rely on if something later goes wrong.
The framework matters because most serious post-completion surprises are legal in nature. A contract that terminates on change of control. A property lease with a break the landlord can exercise. Employees whose contracts were never issued. Each was visible in the paperwork before completion; none is visible in the accounts.
The legal checklist, in priority order
Start with the things that can end the business. Contracts with the largest customers: do they exist in writing, what are the termination rights, and do any change on a sale? Property: is it owned or leased, on what terms, and is the lender's or landlord's consent needed? Debt and security: what is owed, to whom, and what is secured against the business?
Then the things that can cost the business. Employees: contracts, notice periods, any unresolved claims or tribunal proceedings. Litigation and disputes: threatened, pending or concluded. Regulatory: does the business hold licences or consents it cannot trade without, and do they transfer on a sale?
Then the things that shape the price. Intellectual property: is it owned by the company, or by a founder who is leaving? Related-party arrangements: premises rented from the seller's family, loans between the company and its shareholders, management charges that stop on completion. Every one of these is a negotiation point that should be priced, not discovered.
Share sale or asset sale — the choice that changes everything
In a share sale you buy the company: everything it owns, and everything it owes, including the liabilities you did not find. The protection is contractual — warranties from the seller, backed by disclosure — and the diligence has to be thorough because you inherit the lot. On the other hand, customer contracts, employees and licences simply continue, because the company that holds them is unchanged.
In an asset sale you buy selected assets: the equipment, the stock, the contracts you choose, and (via TUPE) the employees attached to the business. The unwanted liabilities stay with the seller. But every contract has to be novated to you, every consent obtained, and the transfer itself has to be documented asset by asset. The protection is structural; the work is larger.
Neither structure is 'safer' in the abstract. The right choice depends on what the business owns, what it owes, and what the tax position of each side looks like — which is why structure is agreed in the heads of terms with advisers in the room, not in the final week.
Turning findings into protection
Diligence findings are only valuable if they change the deal. Small issues are fixed before completion: a missing signature, a licence application started, an IP assignment executed. Mid-size issues are priced: a customer representing 40% of revenue with a ninety-day termination right is worth a lower price or a bigger retention. Large issues reshape the deal: an environmental liability or an unresolved dispute can move the transaction from share sale to asset sale, or end it.
The contractual expression of this is the warranty package, the disclosure letter and — for the risks that matter most — specific indemnities: promises from the seller to pay you back pound for pound if a specific identified risk materialises. A warranty says 'the accounts are true'. An indemnity says 'if the tax enquiry succeeds, I pay the tax'.
We act for buyers at fixed fees agreed in advance, with a diligence report that separates the deal-breakers from the irritants. If you are considering an acquisition, the diligence conversation is worth having before the offer, not after.