Subsequent to the initial negotiations between a seller and a purchaser, when purchasing or selling a business, the legal formalities begin with the drafting of the Sale and Purchase Agreement.
This agreement has many conditions which need to be fulfilled or completed usually by the purchaser and in some instances even by the seller and even a landlord, for the agreement to be confirmed as “unconditional”.
When these conditions are fulfilled or completed and the agreement is confirmed as “unconditional” by the purchaser’s solicitor, the seller and the purchaser are for all purposes bound by the agreement and there is virtually no “turning back” without drastic consequences.
One of these conditions is the Due Diligence condition. Due Diligence is an optional but important condition which enables the purchaser to be satisfied that the business about to be purchased has a “sound bill of health” with regard to the financial viability.
With this condition enabled in the agreement the purchaser gets the opportunity of closely scrutinising the financial and other records of the business, with the full co-operation of the seller, to ascertain that the investment is worthwhile and is financially viable.
If in the reasonable opinion of the purchaser the financial viability is doubtful, then the purchaser has the opportunity to opt out from the agreement on the basis that the Due Diligence condition is not fulfilled.