Make due diligence your strongest asset in a business acquisition
Trust alone is not enough
Proper preparation for due diligence does not begin the moment the documents are put on the table, but in fact much earlier. Every acquisition starts with trust, which ultimately has to be converted into tangible commitments. The buyer wants certainty about what they are buying. The seller has every interest in being able to demonstrate that convincingly and accurately. Those who prepare in good time — as a buyer by investigating critically, and as a seller by being complete — largely determine how smoothly the rest of the transaction will run.
What is due diligence?
Or more specifically: what exactly is examined? A legal due diligence will generally cover:
- The company and its shares
Was the company properly incorporated and is the share register fully up to date? - Contracts
Do the supplier, customer and lease agreements contain a change-of-control clause? - Permits and licences
Does the business hold all the documents it needs to continue its activities? - Intellectual property
Are trade marks and patents adequately protected? - Pending or threatened disputes
Which legal proceedings or potential conflicts could pose a problem? - Employment law and personnel
Are the employment contracts, collective bargaining agreements and non-compete clauses legally in order? - Financial documentation
Are there any agreements or debts that could have an impact? - Real estate
Is the property owned or leased, and are all permits in order? - IP/IT
Are the software and IT systems properly licensed and contractually covered? - GDPR
Does the business comply with the rules on the protection of personal data? - Insurance
Are the current insurance policies transferable?
In addition, tax and financial investigations are usually carried out as well, by accountants and tax specialists. Due diligence therefore forms the basis for correctly translating all findings into a comprehensive agreement.
Duty to investigate versus duty to disclose
A due diligence investigation is not a legal requirement in Belgium. In practice, however, it is almost unthinkable to skip that step, certainly in a transaction of any size. Anyone buying a business wants to know what risks come with it.
The essence lies in the interplay between two key obligations:
- The buyer has a duty to investigate. They must actively establish what they are acquiring, ask critical questions and request the necessary documents.
- The seller has a duty to disclose. They must be open, particularly where information may have an impact on the value of the business
Together, these duties determine who is responsible if unexpected problems come to light after the acquisition. Did the seller conceal something important? They may be held liable for it. Could the buyer have discovered that point through a normal investigation? In that case the buyer can no longer invoke it afterwards as a breach of the warranties.
The most common mistake
Due diligence is still too often seen as a checklist to be ticked off quickly somewhere between the negotiations and the closing. That is a misconception.
A seller who fails to report an issue because it “won’t be discovered anyway” does not thereby make it go away. They merely postpone it. Once the problem does come to light, it is no longer a practical or financial point of attention, but a potential dispute over the warranties in the agreement.
So what should you watch out for as a buyer?
- Set your priorities in advance. Not every document is equally relevant to your transaction.
- Probe further where input is vague or incomplete; an evasive answer is also an answer.
- Translate every finding into a consequence, such as a warranty or a price adjustment.
- Don’t let yourself be carried away by deal pressure: a rushed due diligence simply shifts the risks to the period after closing.
And how do you prepare as a seller?
- Get your file in order before the discussions begin, from contracts to permits.
- Be open, because what stays hidden can come back later.
- In larger transactions, consider a vendor due diligence, since you will then know the points of attention in advance and retain control of the process.
- Involve your lawyer from the non-disclosure agreement onwards.
Conclusion
Due diligence should not be seen as a sign of distrust, but as preparation — and that goes for both parties. As a buyer, your investigation helps determine what you will be able to enforce later on. As a seller, your openness helps determine what you can still be held liable for afterwards. By mapping out risks in good time and making clear arrangements, both parties gain greater certainty. Those who obtain legal guidance from the outset avoid a good deal turning into a drawn-out dispute afterwards.
