The Importance of Due Diligence When Selling a Business
Most people are aware that it is important to undertake due diligence when selling a business. This is largely done to identify what liabilities the buyer will be taking on.
Earlier this week, Sophos – one of the UK’s top cyber security software companies – was due to be sold to a US venture capital company. The sale was halted abruptly, just hours before the deal was due to go through.
Why? Because Sophos was a member of an existing “cycle to work” scheme and this wasn’t picked up through the due diligence process.
Why is this an issue? In the context of certain existing cycle to work schemes, under UK financial regulations a company which is able to offer equipment under such a scheme with a value in excess of £1,000 must be authorised by the Financial Conduct Authority (FCA) and any person acquiring control of an authorised entity must seek the FCA’s approval.
This is something that should be picked up during the due diligence process. However, many companies are unaware that this could mean that they are required to be authorised by the FCA in order to provide this benefit under an existing cycle to work scheme where the values exceed £1,000.
This means that a buyer company may be required to seek FCA approval prior to taking control of a company who is approved by the FCA in order to continue to provide this benefit.
This could be a stumbling block in the context of a business sale for a number of reasons:
- Purchasers from another jurisdiction may struggle to obtain FCA approval.
- If the buyer is unable to obtain FCA approval the scheme cannot be provided to employees which would result in a “measure” under the TUPE Regulations. This would require consultation with the affected employees.
- Regulated entities must have in place a compliance monitoring programme, compliant complaints procedures and regulatory training. They also need to report accurate figures to the FCA.
It should be noted that new cycle to work schemes are not subject to this requirement because the equipment is provided via a “benefit provider” platform.
The due diligence exercise is the most important aspect of a transaction. The Sophos case demonstrates how a failure to pick things up during this exercise can result in a catastrophic falling over of a deal.
Our business team are on hand to work alongside your accountants and guide you through the due diligence process.