Due diligence.

Due diligence is classically divided into several strands. The legal due diligence reviews corporate structure, material contracts, permits, employment relationships, real estate, intellectual property rights and pending litigation. The tax due diligence examines the tax position and possible additional claims. Financial and commercial reviews look at the figures, the market and the business model.

The scope depends on the size and sector of the target company as well as on the chosen transaction structure. In a share deal the review weighs more heavily, because the buyer takes on the company with all its historic liabilities. We define the scope together with you and focus the resources on the areas where the greatest risks lie.

The review usually runs through a virtual data room, in which the seller provides the requested documents in a structured way. Based on a document request list we examine the contracts and records, note open points and raise queries through an orderly Q&A process. Every answer is documented, because it may later become relevant as the parties knowledge.

A confidentiality agreement and clear access rules govern who may view which information. Particularly sensitive data is often disclosed only at a later stage or within a clean team. We manage this process, document the state of the review and summarise the findings in a due diligence report that forms the basis for negotiation.

An orderly due diligence begins with a document request that the seller works through in the data room. This includes a commercial register extract, the articles of association and shareholder resolutions, annual accounts, material supply and customer contracts, lease and leasing agreements, permits, insurance policies as well as records on employees and intellectual property rights. Complete documentation is the basis of any sound valuation.

Gaps in the data room are themselves a finding: missing or incomplete documents increase the risk and are reflected in warranties or purchase price adjustments. We track the state of the request, make open points visible and ensure that for every risk there is either evidence or contractual protection.

Serious findings, the so-called red flags, can fundamentally call the transaction into question or change its structure. More often, however, the findings lead to adjustments: the purchase price is reduced, part of it is secured through an escrow or holdback, or an identified risk is allocated to the seller through a specific indemnity.

The findings feed directly into the warranty catalogue and the indemnities of the purchase agreement. A risk identified during the review can no longer simply be covered by a general warranty, which is why tailored provisions are needed. On the seller side, vendor due diligence can help to speed up the process and to clean up weak points at an early stage.

Caution is warranted when the data room remains incomplete, when the seller answers queries evasively or when important key contracts contain a change-of-control clause that complicates the transfer. A concentration risk with few major customers, looming tax payments or dependence on individual key people are also warning signs that should be spotted early.

The sensible next step is a brief assessment of your starting position and coordination of the review scope with your tax adviser. We plan the due diligence before you commit, coordinate the review and translate every finding into purchase price, warranties and indemnities.