The importance of property due diligence in mergers and acquisitions

Article by Doug Garden, Partner and Project & Building Consultancy Group Leader at Ryden.

Due diligence in mergers and acquisitions continues to play a critical role as the ever changing business landscape inevitably causes an increase in M&A activity. The most valuable asset for most businesses is its people. Next on the list is generally the company's premises, from where the business operates, making the property portfolio important to purchasers or investors.

Where a business is sold as a going concern, is looking for venture capital investment, seeking to restructure or is the subject of a strategic corporate acquisition, it requires to report on its assets to enable investors to make a value judgment on the future. Particularly, whether the property asset, or in some cases liability, may positively or negatively impact the investment return, thorough due diligence on the property must be carried out.

What is the advantage of property due diligence? It aims to establish the true picture concerning commercial premises and their impact on an investor or purchaser. In difficult trading conditions, we recommend that investors and purchasers embrace property due diligence as a wider part of their business planning, whether for investment, sale or ensuring a strong business going forward.

Proper due diligence might also uncover issues. When the property is leased by the target company, we look at the repairing obligations in the lease and check the condition of the property. We can then advise the purchaser on what sort of provision it would be required to comply with the repairing covenants.

This advice is invaluable to a purchaser for assessing the future liabilities they will inherit. For example, would be purchasers shouldn't assume the rest of the facility to be as well presented as the reception or boardroom. This is where a surveyor's assessment really comes into its own to ensure all risks and liabilities are identified.

Merging one or more businesses together will often generate surplus property, If not immediately, then over time as restructuring takes place. Vacant property can still continue to drag on the bottom line due to holding costs like utilities, security, running maintenance and of course business rates which can be crippling. Understanding how to rationalise and mitigate these property related costs can make the difference between a good deal and a bad deal.

Property due diligence can also highlight opportunities for would be investors. We can advise on ways in which a property portfolio could be used differently to maximise the potential of the asset. A purchaser may, for example, end up with property that is surplus to requirements. These could be offered for sale to generate capital receipts.

Furthermore, our planning consultancy and property market specialists could look at the local plan as well as local need to identify whether a change of use of the property could make the property more attractive for sale or lease.

The moral of this story is: "spend a penny to save a pound and consult your surveyor when developing your business by way of mergers and acquisitions.”

For further information, please contact our Building Consultancy experts.