Due diligence (book review) means to investigate the business to be purchased. The buyer provides the seller with a questionnaire containing all the topics and questions they wish to investigate further as part of a proposed business acquisition.

A standard questionnaire is often used, arranged according to the different topics (fiscal/financial/commercial/legal). This questionnaire is also called questionnaire.

The seller then collects all the information requested by the buyer and makes this information available to the buyer in a so-called data room.

Today, this is often a virtual data room, where buyers and their advisors can access the information provided online using login codes.

Interviews with management may also take place as part of due diligence. The reports of these then form part of the data room.

With due diligence, the potential buyer wants to verify that the information and forecasts previously provided and presented to him are correct and that there are no "bodies in the closet. Thus, it is a risk assessment.

So the buyer is trying to make a risk assessment with due diligence. The buyer is trying to form a picture of the company as it would be if the buyer already owned it.

With due diligence, the buyer wants to avoid unwanted surprises at a later date.

Depending on the results of a due diligence, the buyer decides whether or not to move forward in the acquisition process.

For example, results from the due diligence may lead to a further tightening of the previously agreed terms in the letter of intent or require adjustment of the purchase price and/or warranty.

Of course, the outcome of the due diligence may also cause the buyer to wish to abandon the proposed purchase because the outcome of the due diligence is unsatisfactory. Due diligence is often performed by the buyer.

In certain types of transactions, such as auction sales for example, the seller has often already conducted their own due diligence prior to the auction process and potential buyers are handed this due diligence report.

This is then known as vendor due diligence, and this significantly speeds up the sales process.

The main reason for conducting due diligence, of course, is that the buyer wants to be sure he is not buying a "cat in the bag.

The potential buyer wants to verify whether his assumptions based on the presented figures are correct. In addition, the outcome of a due diligence can also be used by the buyer to demand an adjustment of the purchase price.

This then provides the buyer with arguments to renegotiate. Finally, the results of the study also weigh into the formulation of the conditional purchase agreement, especially the warranties and indemnities.

No. Dutch law is based on the principle that the duty to provide information takes precedence over the duty to investigate. But this does not mean that the buyer has no obligation to investigate and can just blindly accept everything from the seller.

Buying a business is somewhat different from buying a loaf of bread from the bakery around the corner. Therefore, the buyer is quickly expected to do some research on the business and ask (critical) questions of the seller.

If the buyer fails to do so, it becomes significantly more difficult for him to appeal to the seller if it turns out that he has bought a "cat in the bag.

This is highly dependent on the type of transaction. The scope of the investigation is determined by buyer and often goes beyond simply examining the information provided based on the questionnaire and interviews.

Often the buyer is also expected to do independent research with any registers and land records and sometimes a soil survey.

If the buyer chooses not to investigate anything, he thereby runs the risk that he cannot claim under the warranties, or that he cannot claim at all that his expectations have not been met.

For the buyer, the most important thing is to research the things that are important to the value to the buyer of the business. Consider the supplier or buyer contracts, having certain permits or having facilities, any intellectual property rights and/or the level of training of the staff.

Under Dutch law, the basic principle is that the duty to disclose comes before the duty to investigate, but practice is more recalcitrant. The seller's obligation to disclose versus the buyer's obligation to investigate are communicating vessels.

In principle, if the seller knows or should know that certain information is important to the buyer, the seller should point this out to the buyer.

But if the seller has lifted a tip of the veil on this and the buyer neglects to ask any further questions, then any adverse consequences of this could simply be at the buyer's expense and risk. That is why it is so important for the buyer to conduct careful due diligence and to ask critical questions.

In that case, the buyer will have to negotiate as many guarantees as possible from the seller and, as far as possible, conduct his own investigation. The risk then falls more on the seller, because in that case there will soon be a breach of warranty.

They often work with a more or less standard questionnaire with all kinds of questions in the financial, legal, fiscal and commercial fields. The most important aspects are often:

• Important agreements such as for example distribution, agency, licensing and franchise agreements, shareholder agreements, agreements with large commercial interests, supplier agreements, etc.
• Fiscal aspects
• Financial information. Consider bank guarantees, money loans, liens and mortgages, credit agreements, leases, 403 statements, etc.
• Intellectual and industrial property rights. Examples include trademark rights, copyrights, patents, know how, etc.
• Legal structure and internal organization. Examples include deed of incorporation, bylaws, minutes of board meetings, general meetings/ supervisory board meetings, any regulations.
• Legal proceedings
• Staff
• Applicable regulations and permits
• Insurance
• Real estate
• Competition. Consider, for example, any price fixing or agreements with competitors.

Often the financial/tax due diligence is performed by accountants and tax specialists and the legal research by lawyers. Any interviews with the management of the company to be sold are often conducted by the prospective buyer himself.

While it is common in practice to share the due diligence report, this is not always wise from a buyer's perspective.

Sellers can use the results of due diligence conducted by the buyer to defend themselves against a subsequent claim by the buyer. After all, the seller can more easily prove that the buyer knew about it and apparently took the risk of not raising the issue further with the seller.

To prevent a buyer from later being forced by a judge in any legal proceedings to hand over the due diligence report to the seller, the results of the due diligence are often also nowadays given in the form of an opinion rather than a bulky due diligence report.

This advice is then specific to the buyer, making it less easy for the seller to put the risk on the buyer's plate with reference to a specific provision in a due diligence report.