M&A: Why should a buyer conduct due diligence?

Due Diligence

If you want to acquire a business or a company, should you conduct due diligence on the target?

“Buyer beware” or “𝘤𝘢𝘷𝘦𝘢𝘵 𝘦𝘮𝘱𝘵𝘰𝘳” in Latin is a common law principle that a buyer buys at his own risk in the absence of an express warranty in the contract.

Due to this principle, a prudent buyer would want to carry out due diligence on the target to get the relevant information to assess the purchase.

The buyer uses the information obtained from due diligence to:

(1) assess the strengths and weaknesses of the business

(2) determine the price or basis for price adjustment

(3) identify issues and liabilities of the target which should be addressed in transaction documents or which affect the deal structure

(4) identify third party notifications or consents which may be required for the transaction

(5) where the buyer is a public listed company, it may have to get its shareholders’ approval for the acquisition, in which case, due diligence must be conducted to ensure the information in the circular to its shareholders for the purpose of voting on the acquisition meets the requirement under the relevant listing requirements

(6) decide whether to proceed with the acquisition.

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This post was first posted on Linkedin on 17 January 2023.

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