Yes, an offer to buy a business should generally be subject to satisfactory due diligence. This allows the buyer to investigate the company's financial performance, legal obligations, operations and potential risks before committing to the purchase. Making an offer conditional on due diligence can provide an opportunity to renegotiate terms or withdraw if significant issues are discovered.
There are three main reasons to include this condition:
- Verify financial information: Confirm that reported revenue, profitability, cash flow and liabilities are accurate and supported by reliable documentation.
- Identify potential risks: Investigate legal disputes, outstanding debts, employment obligations, customer contracts and operational dependencies that could affect the acquisition.
- Protect your position: Allow for further negotiations if due diligence reveals issues that materially affect the business's value or the proposed transaction.
For example, a buyer may offer £500,000 for a business based on its reported financial performance, subject to verifying the accounts and identifying any undisclosed liabilities.
The conditions should be clearly documented, typically in the initial offer or Heads of Terms. Buyers should seek legal advice to ensure the wording provides appropriate protection, as the ability to withdraw depends on the terms agreed and any binding obligations.
Read more: Heads of Terms in a Business Sale
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