LATEST NEWS

“We are doing due diligence”. What does that mean?

What is due dilligence?

Before most transactions complete, the parties need to get to know each other and understand their risks. This is known as “due diligence”.

The phrase comes from the US where sellers are expected under securities and other laws to allow buyers to undertake “reasonable investigations”.

An industry (including many of the lawyers currently in practice in England) has developed to undertake this work: in essence, it is about telling the client what the risks are and then helping evaluate them. Some clients are afraid of it: who enjoys asking or answering the difficult questions? Others see it as a form of deal prevention. Very few look forward to it.

Of course, a due diligence process does not need to be that painful. In practice, the investor or proposed counterparty simply wants to know what they are getting into. After initial enquiries, it should be clear what the long list and short list of risks will be.

Enquiries generally fall into four categories: commercial, legal, tax and accounting and different specialists are required for each. Coordination is therefore an essential discipline.

Once the general picture is clear, the next challenge is to deal with the specific risks.

Some risks will need to be remediated. For example, if key aspects of a company’s business are based on verbal agreements, the terms will need to be documented.

Other risks are simply facts that need to be understood and therefore quantified. The advisor will help answer a number of “what if” questions so that the relevant scenarios are understood. Formal opinions may need to be written setting out red flags, amber risks and green lights.

At the end of the process, there may be a go / no go moment. Without exception, conduct of the due diligence phase will affect the timing of the deal or decision.

Our role as lawyers is to advise on legal risks. What we at MDS Advisory will do, however, is also spend time digesting the advice from the other advisors and sources and then give our view on the big picture, where we consider it is right to do so. If the client needs us to step in, that is what we will do.

We feel comfortable doing this because of the depth of experience that our partners have as a result of long careers on the client and advisor side. We feel able to do it because we make every effort to get to know our client’s business and needs. We see this as something that differentiates us from our competition.

Of course, due diligence services sit alongside other advice. Generally, that is the drafting and negotiation of the transaction documents, whether it is a share sale or subscription, asset purchase or development agreement. MDS Advisory has recently completed a number of such engagements.

If you would like further information on how we can assist then please contact: Adam Oliver on adamoliver@mdsadvisory.com for company and commercial legal advice and Michael Spencer on michaelspencer@mdsadvisory.com for construction and project advice.