Dragons’ Den: why do the entrepreneurs fail to receive investment once the cameras are cut?

An exciting pitch and an investable business – usually the two core components to a contestant on Dragons’ Den being successful and leaving the “Den” with a pledge for investment from the dragons.

Unfortunately, securing an investment or a sale is not as quick as some viewers may be led to believe, and despite the entrepreneurs seemingly having “won” over the business tycoons, almost 50% of the deals agreed collapse when the cameras stop rolling.

Once an entrepreneur has won investment from the dragons, the next stage of the process – which you don’t see on the show – is for the investor to conduct due diligence on the target business.

This due diligence investigation will typically be split into two or three sections depending on the nature of the business: (a) Financial Due Diligence; (b) Legal Due Diligence; and (c) Regulatory Due Diligence.

It is this stage of the process where, behind closed-doors, deal destroying issues that weren’t immediately known during the show start to emerge.

Legal Due Diligence:

A legal due diligence investigation will focus on the fundamental aspects of a business (i.e. corporate structure, key contracts, intellectual property, employees).

When an issue is discovered during due diligence it can lead to price deductions, changes in deal structure, and in the extreme circumstances, a buyer walking away from the deal due to an unsurmountable perceived risk. Further, unknown issues arising during due diligence may cause significant delays to the sale process as well as costs to the seller in rectifying the identified issues.

Examples of common legal issues that would concern a buyer are poor record keeping or the failure to document key transactions in the company’s past. This will usually be uncovered during the potential buyer’s review of the company’s “statutory registers” (registers showing previous shareholders, directors, etc), as well as historical, non-compliant share buy-backs. These issues can cast doubt over whether the buyer will, following completion of the investment, have good title to the share of the business they’re acquiring. Both of these issues can halt the sale process, and at a minimum, lead to additional costs and delays.

Lessons to learn: Preparation

A key preliminary step for an SME business owner who is preparing for an exit or pitching for investment is to undertake an internal review and rectification exercise in relation to their business.

We frequently work with business owners to review each section of their business to identify and rectify any potential issues prior to the sale or investment process commencing. As a full-service law-firm, our team offers clients full assistance in any corporate, commercial, employment or property matters that may impact or be relevant to their business.

This can range from reconstituting incomplete statutory registers to formalising an “informal” lease arrangement.

Ultimately, undertaking this preparatory exercise provides the opportunity for the business owner to identify any issues and rectify before going to market to secure a buyer / investment, and allow for a legal remedial exercise to be undertaken in advance of the transaction. This reduces a seller’s exposure to their deal collapsing or the purchase price being reduced as a result of a previously unknown issue arising after the ‘handshake’.

At Herrington Carmichael we have specialist Corporate Lawyers who can help you. If you would like to know more about selling your business or assistance with legal due diligence, then contact us.

Harry Winkley
Solicitor, Corporate
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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