Due Diligence is essential for any company that wants to merge or acquire another firm to ensure that the investment is worthwhile. This process of collecting the seller’s financial information and scrutinizing it can either validate the decision or reveal potential issues. This process can appear to be complex, partly because there are several steps to a robust Due Diligence checklist or process, and also because each country has its own regulations and methods. Read on to learn about our Due Diligence Checklist for the UK.
While not entirely “mandatory,” a proper Due Diligence plan or Due Diligence checklist for the UK can help companies avoid predicaments with the UK Takeover Panel and Financial Conduct Authority (FCA). Due Diligence provides a documented, auditable review of the merger or acquisition transaction that is transparent and reduces the likelihood of unlawful deals.
What is the UK Due Diligence process?
The Due Diligence process in the UK has certain particularities due to its regional laws that regulate company takeovers and acquisitions. Some examples of these regulations or enforced guidelines are the Company Act of 2006, the UK Takeover Code, and the Market Abuse Regulation (MAR). Furthermore, under English law it is the buyer’s responsibility to ensure they are fully aware of the potential risks of any merger or acquisition transaction.
Views of what constitutes “proper” Due Diligence have evolved, so recommendations have become more complex. This has resulted in various types of diligence developing, such as:
- Financial and Assets
- Human Resources
- Intellectual Property
Due Diligence in the UK can take anywhere from a few days to several months depending on the size and complexity of the company under investigation. The process should be relatively quick and painless in the case of small startups, especially if they have kept good records. On the other hand, the process can be extremely lengthy for larger enterprises.
Furthermore, the people involved in the process can quickly multiply if Due Diligence is carried out from several angles. This can increase the timeline and should be considered during the merger or acquisition planning phase.
What is the process actually like?
In theory, the Due Diligence process consists of only four steps. You will collect data, analyze it, evaluate your analysis with key stakeholders, and create a report based on your decisions.
The most time-consuming aspect of this process is collecting the data. In this step, the potential buyer will usually send a request for information to the seller in writing, where the buyer specifies all the information and supporting documents required for the Due Diligence process.
We have crafted an essential Due Diligence Checklist for the UK to better understand what is involved and to make sure you get all the information you need.
Our Essential Due Diligence Checklist for the UK
This checklist is far from exhaustive, but it includes key questions that will help you to quickly conduct a thorough investigation. Ideally, the seller should provide documentation to verify all of the following questions.
This documentation can include anything from Articles of Association to tax returns, meeting minutes, employee handbooks, and more. Going back three to five years is common practice for most financial documents, although records going back further can be requested.
To use this checklist, first make sure you have set up clear communication channels with the seller and their Finance, Legal, Human resources, and Marketing departments.
- What are the company’s products and services?
- What is the company culture, and how do employees feel about the company’s culture policies?
- What is the manufacturing, distribution, and sales process? How are they linked?
- Does the company offer product trials or warranties?
- What are the consumer complaints?
- Does the company have any third-party contracts or obligations (partners, suppliers, etc.)?
- What are the product pricing and revenue models?
- What are the profit margins?
- Does the company offer custom quotes?
- How old is the company’s equipment and software? Does it need an IT upgrade?
Finance and Assets
- Have annual reports for the past five years been provided?
- What are the cash flow projections for the next five years?
- Does the company offer a market share? What are the values?
- Who are the shareholders, and what percentage of the company do they own?
- Are there any outstanding debts or unpaid expenses?
- Is there available equity?
- How does the company evaluate depreciation and amortization?
- What kind of assets does the company own? Are they tangible assets?
- Are the assets fixed or variable?
- Does the company own trademarks, patents, trade secrets, or other intellectual property?
- What insurance policies does the company have?
- Have they had any insurance claims in the past?
- Have records of the company’s tax returns been provided?
- Does the company have a history of litigation issues?
- Are their licenses and permits up to date?
- Are there any potential environmental risks or issues, including the use of hazardous materials or dubious disposal methods?
- If the company is in financial services or fintech, have they complied with money laundering requirements or other related regulations?
- Has the company provided copies of the Minutes to Board Meetings and shareholder meetings?
- Do they have licensing or franchise agreements?
- What is the corporate structure?
- Does the company employ partners, consultants, or independent contractors?
- Is the organization appropriately staffed?
- How does the company gauge employee feedback, productivity, and satisfaction?
- How do individual employees and departments communicate? Are teams siloed or working collaboratively?
- What is the staff turnover rate?
- How difficult is it to replace staff or recruit new employees? What types of skills are required?
- What is the professional experience of the executive team?
- What are the current employee roles, salaries, and benefits?
- Does the company have an employee handbook?
- What are the company’s policies on leave?
- What do the onboarding and exiting processes look like?
- Have there been employee complaints or compensation demands in the past? How were they resolved?
- Are there any potential health risks to employees?
- What is included in employee contracts?
- What channels does the company use for marketing and advertising?
- Why did they choose these channels?
- Do they have both short-term and long-term strategies in place?
- What KPIs are they monitoring?
- Do they have a budget for advertising campaigns?
- How effective are their marketing and advertising campaigns?
Due Diligence is somewhat of an ambiguous term. While it is often required to comply with UK laws, the actual process can be somewhat flexible. You can easily do your part in verifying that a merger or acquisition is a sound investment by committing to documenting as much information as possible and analyzing that data.
Once you finish our Due Diligence Checklist for the UK, you will have asked yourself and the seller several strategic questions. You will then want to sit down, review the data, present it to other stakeholders, and come to a decision.
The Due Diligence process may identify certain liabilities that can be dealt with either before or after the acquisition. However, it might bring to light issues that cannot be overcome and you may decide that the M&A is not worthwhile. Ultimately, you should have developed an in-depth understanding of the company, its weaknesses, and its potential. Following the Due Diligence process will ensure you comply with UK regulations and make the correct decision about whether to invest or not.