The importance of due diligence when selling your company

There are many aspects to selling your company before completion is achievable – deciding whether it will be a share sale or an asset sale, the due diligence process and the documentation itself.

Due diligence is a significant part of the transaction and one that sellers need to be acutely aware of. This process is where the buyer requests as much information that they can regarding the company such as the structure, accountants, employees, litigation and property. It is imperative that the seller engages with this process  as there are ramifications if it is not completed accurately, if known information by the seller about the company is not made to the buyer before completion.

The importance of disclosure became apparent in the recent case of Equitix EEEF Biomass 2 Ltd v Fox [2021]. In this case, the buyer purchased all shares in an energy company, whose business involved supplying heat energy from steam generated by two biomass boilers to a sole customer.

The operation of the boilers was regulated by a permit, issued by the Environment Agency in 2014, which was subject to a number of conditions, including provisions determining the scope of the target’s permitted activities and the methods to be used in carrying them out.

There were detailed warranties set out in the Share Purchase Agreement (SPA) to be given as at the completion date.

These included:

  • The condition, repair and capability of the target’s plant and equipment (including the biomass boilers);
  • Compliance with the environmental permit;
  • The reasonableness of the projections and forecasts in the financial model relating to the performance of the business (provided to the buyer in April 2015 during negotiations);
  • The status of the target’s material contracts.

The price payable for the shares was £16.45 million and a limit was put on the seller’s liability for warranty claims at £11 million. There was a provision drafted in the SPA that the buyer would take reasonable steps to reduce any loss suffered by the buyer or the target which could, or might result in, a claim against the sellers. The sale completed in August 2016.

In 2015, before the deal completed, the biomass boilers had numerous stoppages and low performance standards, which caused difficulties in performing the sole customer contract which persisted after completion. The result was that in 2017 the customer terminated their contract with the target for performance failures.

In 2018, the buyer commenced proceedings against the sellers for breach of warranty, alleging plant and equipment was not in good repair and was not used in accordance with the environmental permit, that boilers had not been properly commissioned and the Company was unable to the meet the customer’s demand, feedwater used by the boilers was impure, refractory walls of the boiler and the boiler itself had not been installed properly nor properly serviced and maintained.

The sellers attempted to argue that the buyer’s warranty claims were excluded because the matters giving rise to them had been disclosed or were within the buyer’s actual knowledge and were, as such, precluded by a provision in the SPA, where the buyer confirmed that it was not actually aware of any fact or matter that constituted a breach of warranty at the time of entering into the SPA.

The court awarded the buyer damages of £11 million. The seller’s arguments that the buyer had a duty to mitigate as per a clause in the SPA were also rejected, as the court viewed that it was not reasonable for the buyer to pursue the customer to enforce their rights under the contract and for terminating its contract with the target. The onus was on the sellers to show an unreasonable failure to mitigate and it was not enough to show that the steps the sellers proposed would be reasonable.

The seller should have disclosed the issues as set out above during the due diligence process at the outset of the transaction. If these were specifically disclosed and the buyer proceeded to purchase the company with the knowledge of these then the buyer would have been unable to bring a breach of warranty claim against the seller as they were aware of the problems before and at completion. As a seller in this process you need to ensure that you disclose all to the buyer about the company no matter how small you think it may be in order to reduce the likelihood a claim being pursued against you, too much information is always better than less or in this case none. The only saving grace for the seller was that they had limited their liability at 67% of the purchase price to avoid the potential of a total loss of the sales proceeds.

Here at Bromleys, we can assist you with selling your company and will explain and assist throughout the process of due diligence.  Also, we can support you in the process of purchasing a company and the relevance of due diligence from the perspective of a buyer.

How we can help

To find out how we can assist, contact our experts 0161 330 6821 or email our new enquiries team at newcorporate& for your free initial telephone discussion. If you prefer, you can fill in our online form or alternatively, you can email us on and we’ll call you back.