At the initial stages of an acquisition, a buyer may well have limited information about the target company. Preliminary negotiations will have been based on publicly available information, such as the accounts of the company filed at Companies House, the buyer's own dealings with the target company and the information the seller has been willing to share with potential buyers.
Once the key terms of the transaction have been agreed, and perhaps recorded in a set of heads of terms, the buyer will often want to investigate the affairs of the target company in a lot more detail by way of making various enquiries of the seller in relation to the target company. This process is called “due diligence” and its aim is to assist the buyer in ascertaining whether the price it has offered to pay for the company is a fair one.
Given the common law principle of 'caveat emptor' (buyer beware), due diligence, combined with the warranties given by the seller in the share purchase agreement, plays an important role in an acquisition.
As well as the key areas, such as legal title to the shares and authority to enter into the transaction, topics that may be covered as part of the due diligence process, depending on the nature of the business, include commercial contracts, finance, taxation, property, environmental, employees, intellectual property, IT and compliance with legislation.
However, not all buyers are concerned with due diligence and may take more of a risk v cost approach and carry out limited due diligence. This may be the case, for example, where the purchase price being paid is very low or the buyer already knows the business very well.