Due diligence when buying a business: types and checklist

Due diligence is the review you carry out of a business before you commit to buying it. You check whether the figures hold, whether contracts are as the seller described them, and whether there are risks you did not know about. The review usually takes place after you have agreed price and main terms in a letter of intent and before the purchase agreement is signed.

This guide describes the different types of due diligence, what to check within each, how long it takes and which advisers you need. The process itself — from NDA and data room to what you do with your findings — is in the buyer guide chapter on due diligence. The seller’s side is described in chapter 9 of the seller guide.

Asset or share purchase changes the scope

If you buy the company (shares), you take over everything it owns and owes — including taxes, disputes and obligations from before your time. The review must be broad, and the warranties in the purchase agreement matter. If you buy the assets, you generally only take over what is on the asset list. The review can be more focused, but you still need to know whether earnings hold and whether contracts, permits and employees come with the business. See asset or share purchase.

Financial due diligence

The financial review must answer one question: what does the business really earn, and can it continue? This is where most price adjustments arise.

• Annual reports for the last three years and an up-to-date trial balance for the current year
• Reconciliation of revenue against bank accounts, VAT returns and payment providers
• The seller’s normalisations: owner’s salary, one-off items and private expenses — with documentation
• Gross margin and costs by month, so seasonality and trends can be seen
• Working capital: stock, receivables and payables, and what a normal level is
• Debt, leases, guarantees and other obligations, including those off the balance sheet
• Budget and assumptions for the coming year
• Customer concentration: how large a share the biggest customers account for

Ask for source data rather than summaries. A bank statement or an export from the accounting system says more than a table in a presentation. Agreeing a normal level of working capital matters, because otherwise a seller can collect receivables and delay payments just before the takeover.

Tax and duties

In a share purchase you take over the company’s tax history. Check that corporation tax, VAT, withholding tax, labour market contributions and any duties have been reported and paid, and whether there are pending cases with the Danish Tax Agency. In an asset purchase the risk is smaller, but the allocation of the price across the assets affects your depreciation. See tax on the sale of a business for the seller’s side.

Legal due diligence

The legal review must show whether the business owns what it says it owns, and whether contracts continue after the takeover.

• Company documents: articles of association, register of shareholders, shareholder agreements and CVR registrations
• Material customer and supplier contracts, especially change of control and termination clauses
• Lease: term, termination, and whether it can be assigned to you
• Employment contracts, key people, non-compete and non-solicitation clauses
• Rights to name, trademarks, domains, software and content
• Permits, authorisations and licences — and whether they are personal
• Disputes, complaints, warranty claims and cases with authorities
• Processing of personal data: data processing agreements and the basis for customer and marketing lists
• Charges and retention of title: check the Personal Register and the Vehicle Register at tinglysning.dk

In an asset purchase, employees generally transfer with the business under the rules on transfers of undertakings, with the rights they have today. Find out what that involves before you settle on the price.