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Due Diligence – is it worth the effort?

For any major commercial transaction, you need to know exactly what you’re getting into and ensure (as far as is possible) that there aren’t going to be any nasty surprises further down the line.

In the same way that you would call on the services of a surveyor when thinking about buying a house, due diligence when you are merging or acquiring a practice can help you see what’s below the surface and avoid you making a costly mistake.

A GP practice merger or acquisition will typically involve:

  • Legal due diligence – which focuses on all legal arrangements associated with a practice; and
  • Financial due diligence – which examines the accounts and all financial dealings, usually from the last 3-4 years

For this blog, we are going to focus on legal due diligence.

Who can carry it out?

You may choose to carry out due diligence yourself, or ask your solicitor to deal with it. Using a solicitor has the benefit that everything will be documented in a business transfer agreement, with appropriate legally binding warranties and indemnities.

While certain issues are easy to identify, others are not. An experienced solicitor will know what to ask and recognise potential risks which you will want to know about.

What kind of risks may be identified?

In a GP practice merger or acquisition, the biggest risks will often be associated with:

  1. property
  2. the core contract
  3. staff
  4. pensions

but there may be others and it is important to undertake suitable investigation and raise enquiries.

Examples of issues you need to be aware of are onerous business contracts, unresolved disputes, and pending or threatened legal actions. Some of these will be documented, but others might not be.

Warranties & Indemnities

If there is any uncertainty, then you have the option to ask for a warranty from the partners, whereby they legally confirm what they have said is true. This may offer some comfort, but you may also want a series of indemnities to protect you from future liabilities crystallising. Just bear in mind that an indemnity is only as good as the financial standing of the person who gives it.

Our recommendations

At the end of the due diligence exercise, you should feel confident that you understand any risks and can make one of three choices: accept the position, mitigate the risks or walk away.

Undertaking a merger or acquisition is a big decision. The benefit of due diligence is that it can help you identify early on where the high-risk areas may be. It isn’t something you have to do, but we would always recommend it.

Fortunately, most practice mergers go through without incident and due diligence doesn’t reveal any problems. However, for those unlucky few where a major problem is highlighted, it will have been time and money well spent. Think of a due diligence exercise as similar to taking out an insurance policy.

For more information, please contact Daphne Robertson on 01483 511555 or email d.robertson@drsolicitors.com