Due diligence checklist for an asset transfer transaction

What is due diligence on an asset transfer?

Due diligence is the process of conducting a thorough investigation and interrogation of the assets involved in a transaction. It is typically performed by the acquiring party (the buyer) to assess the value, risks, and legal aspects associated with the transfer of assets from one entity to another. The purpose of due diligence is to gather relevant information, identify any potential risks or liabilities, and make informed decisions regarding the asset transfer.

Due diligence checklist

The specific due diligence that needs to be carried out will vary depending on the nature of the particular asset transfer transaction. The checklist below covers the due diligence process for a standard asset transfer transaction:

1. Legal due diligence

This part of the due diligence aims to ensure that the assets can be legally transferred without any significant legal issues or potential liabilities. It typically includes:

1. IP - to ensure the seller has all necessary rights to intellectual property that is being transferred, and that those rights are free from encumbrances and third-party claims;

2. Data protection - to ensure that the seller has complied with data protection laws in respect of the business and that it is not subject to any regulatory or other action;

3. Contractual - reviewing and assessing all contracts related to the assets being transferred to ensure that all contractual obligations and rights are properly identified, understood, and accounted for in the transfer. It is also important to check there are no contractual restrictions on transferring, novating or assigning the contract to the buyer;

4. Litigation - to check that there is no ongoing litigation or legal claims affecting the assets;

5. Regulatory - to ensure that the seller has complied with all regulatory requirements in respect of the assets, including health and safety and environmental rules; and

6. Employment - if employees will be transferred to the seller as part of the asset transfer, it is important that the buyer checks that the seller has complied with employment laws and will assist with the TUPE process.

2. Financial due diligence

This involves reviewing financial statements, tax records, and other financial documents that relate to the assets to evaluate their financial state, profitability and any potential financial risks.

1. Financial accounts / statements - to check the business’s historic financial position;

2. Tax - to ensure that the business does not face any tax liabilities and has been compliant with relevant tax laws;

3. Forecasts - to assess the business’s financial future. This could also include analysing market conditions, the competitive landscape, the customer base and the growth potential of the assets.

3. Commercial due diligence

This involves assessing the commercial and operational aspects of the assets being transferred, including their physical condition, operational efficiency, maintenance history, and any potential risks or limitations. This could include:

1. Equipment - to ensure that the condition of all equipment being transferred is to a sufficient standard, it has been properly maintained and there are no issues with the equipment’s operating capabilities;

2. IT - to ensure any IT infrastructure being transferred is functioning properly, will continue to function upon transfer and will be capable of maintaining business continuity; and

3. Insurance - to ensure that all necessary insurance requirements are in place and, where necessary, will transfer upon completion of the transaction.

4. Industry-specific due diligence

If the business being sold operates in a regulated industry, it is important to ensure that the business has complied with all necessary regulatory requirements. For example, it is the assets of a financial services business that is regulated by the FCA, all FCA-specific requirements and rules should be assessed.

Final thoughts

After you have carried out your due diligence and are ready to proceed with the transaction, Docue’s asset transfer agreement template can be used to produce a tailored and comprehensive asset transfer agreement in no time at all. Simply answer a series of simple questions and you can easily produce a customised business asset transfer agreement that meets your needs.

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