Due diligence

Commercial DD reviews the performance of the target entity. It usually occurs as a first step in the process of acquiring a company, before detailed financial, tax and HR DDs are carried out.

In a commercial DD, we typically review:

• Your target’s reliance on key customers and suppliers
• KPIs and how they have changed, both over time and across different product lines where applicable
• The market your target operates in – any key market forces, competitors and pending market changes
• Any gaps in your target’s business and marketing plans and how you might address them post-acquisition

Management accounts usually form the basis of the price paid for a target entity. By reviewing the veracity of these figures, we can help ensure that you don’t overpay for the company.

While the scope of each financial DD is bespoke, each tends to involve:

• Collecting evidence that assets are held at their recoverable amounts and no provisions or impairments are required
• Reviewing liabilities and ensuring all liabilities are recognised
• Determining if income has been recognised in line with the relevant accounting policies and contract terms
• Establishing whether relevant expenditure for the period has been included and determining the underlying profitability of your target business

When shares in a target entity are acquired, so is the tax history of the target. It is therefore important to understand the tax risks the company faces.

In a tax DD, we typically review:

• Corporation tax – ensuring compliance and summarising key risk areas including R&D, transfer pricing and corporate tax residency
• Employment tax – looking at consultant relationships, employment related securities (share schemes) and Covid furlough scheme claims
• VAT – reviewing compliance, non-standard VAT treatments including partial exemption calculations, potential liabilities under the capital goods scheme and any options to tax
• Stamp taxes – reviewing transactions which could trigger a stamp tax, including de-grouping charges

In structuring the transaction, we would typically advise on:

• Acquisition vehicle and structure – the pros and cons of using a UK acquiring entity vs an offshore entity, so as to maximise tax efficiencies and ensure there are no adverse tax implications of the structure
• Acquisition method – the form of the consideration (cash, shares, debt) and its implications; where appropriate, preparing and submitting applications to HMRC for clearances or exemptions
• Share schemes – which taxes are required to be collected on the exercising of the share schemes and on the consequential sale of the shares

When buying a target entity, you would adopt responsibility for its employees: the people who embody the business’s culture and success. Overlooking these aspects of a merger or acquisition, especially when TUPE comes into play, can lead to significant problems.

Sometimes referred to as ‘emotional due diligence’, our reviews typically cover:

• Employee records including rights to work and background checks – ensuring legal requirements are adhered to pre-transfer
• Cultural compatibility – are the leaders of both businesses like-minded and committed to the same vision?
• Potential liabilities past, present and future –employee relations issues, redundancy liabilities and performance concerns
• Comparing remuneration and benefits packages to those offered as standard by the acquirer to highlight any potential changes which would be required