Financial & Legal Due Diligence

The Process

When the price and other terms of the deal have been agreed and following the signing of a term sheet or heads of agreement, the due diligence process can start.

The process will be much shorter in an MBO as the management team should be well acquainted with all financial and operational aspects of the business.

Despite knowing the above mentioned aspects of the business, the management team should undertake both financial and legal due diligence as they will be embarking on the most expensive acquisition, they are likely to make in their lives.

DCA Corporate orchestrates both the due diligence process and the Share Purchase Agreement (SPA).

The SPA is the document which ultimately governs the terms on which the company is sold to the buyer. It is normally prepared by the buyer’s solicitors and negotiated at length between the parties and their advisers.

The SPA has two main purposes. Firstly, it sets out the mechanics of the sale of the company, such as how the purchase price will be paid, which directors will resign at completion and who will replace them. Secondly, it protects the buyer from some of the possible problems within the company, either unknown or discovered during due diligence.

It does this using warranties, statements of fact about the company given by the seller. If any of those warranties prove to be untrue, and the buyer suffers loss as a result, the buyer may be able to claim compensation from the seller.


The negotiation of the warranties is often the biggest issue in agreeing the SPA. This will also involve agreeing a set of limits on the seller’s liability to pay for breaches of warranty, such as a maximum amount (usually the purchase price) and a time limit for the buyer to bring any claims. The seller will also want to protect himself by the process of “disclosure”. This involves the seller setting out any exceptions to the factual statements in the warranties in a document known as a disclosure letter. This is yet another document to be negotiated between the parties.

Although the negotiation of the SPA is far less onerous where there is an MBO, it is still advisable for both the MBO team and the owner to instruct legal advisors. DCA Corporate can assist both parties regarding this instruction.

If the MBO team feels that the likelihood and scale of any potential liabilities is small, then it may be decided to proceed with a much more streamlined SPA in the interests of getting the deal done quickly.