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Due diligence (financial and legal)

Once the institutions have decided on their preferred course of actions it is recommended that they complete their own initial financial appraisal.


The decision to merge should be informed by a detailed risk analysis. The risk analysis will be informed by a review of the prospective partners, referred to as due diligence. This exercise builds the knowledge base that each of the merging partners has about the other and should help to build trust. It is important to know if there are any 'deal breakers' that could lead to a challenge to the merger progressing.

Equally it is important that the boards have acted appropriately in a merger or federation scenario and explored all known risks and opportunities before reaching a decision. Due diligence generally refers to financial due diligence but boards will also need to consider legal (and property) due diligence. Appropriate external, independent financial and legal advisors should be appointed to carry out this work.

It is common for both parties to jointly appoint an advisor (one for financial and one for legal) to report on each entity and on the viability of merged entity. In some circumstances institutions may seek to pursue their own due diligence exercise on the other party or parties. Where this is likely to cost more than appointing a single advisor for all merging colleges, SFC will want to consider carefully the case for the additional investment.

What will the legal and financial due diligence include?

The financial due diligence exercise will include a review of the following:

  • History and activities of the college
  • Accounting policies
  • Audit issues
  • Financial accounting and control systems
  • Financial performance
  • Consideration of assets and liabilities
  • Cash flows
  • Taxation
  • Pensions and pension accounting
  • Risk management
  • Post-merger financial and operational planning

The legal due diligence exercise will report on the legal affairs of the college and will include:

  • A review of leases and title deeds held
  • A review of any ongoing litigation
  • A review of staff terms and conditions
  • TUPE considerations
  • Intellectual property rights
  • Insurance
  • Health and safety considerations
  • Consents
  • Corporate structure

Whilst the themes above would form part of any legal and financial due diligence exercise, consideration should also be given to undertaking a culture review at an early stage. The existing culture that partner organisations bring to the new institution will have a considerable impact on its success.

Example invitation to tender for a financial and legal due diligence

Example of Invitation to Tender for Due Diligence [Word]

Example of Invitation to Tender for Due Diligence [PDF]



This guidance was developed in 2012 and will be reviewed.

Your feedback is important so let us know where you have used it or how it can be improved by contacting Linda McLeod, email: