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The Importance of Legal Due Diligence

by | Feb 26, 2024 | Business Law, Contract Law


Every business transaction is different. What should not differ is the approach to completing a business transaction, especially the acquisition or sale of a business. Legal due diligence gives both buyer and seller the opportunity to evaluate the possibility of legal risk, financial risk, lawsuits, etc. before completing a sale. Both parties would be wise to conduct this examination so they can make an informed decision. In this blog, we will focus on why you should want to conduct this type of analysis and what information to gather.

The purpose of legal due diligence is straightforward, it is to make sure that everything is in order with regard to the transaction. While it is possible to conduct this yourself, there may be blind spots you or your in-house counsel can miss. This can range from pending lawsuits to misrepresented assets. Taking care of this at the front-end can help ensure a smooth transaction. If both parties are transparent from the beginning, there is usually less work to do and less to worry about. However, no matter which side of the deal you are on, stakeholders will always want to be reassured that the transaction can withstand rigorous scrutiny. The following areas of concern are some of the more important focus points during the sale of a business that don’t involve finances.

Existing Contracts – These can easily be overlooked but can really make or break the sale of a business. As a buyer, you will want to make sure that you are not taking on unfavorable long-term agreements. As a seller, it is worth addressing any agreements that can be seen as restrictions or a handicap on assets. Either way, copies of any existing contracts should be reviewed as they relate to the business.

Organizational Matters – Problems can arise from anywhere for a business but one area that can be extremely problematic to address is difficulties with other owners or shareholders. It is crucial to understand and review the structural documentation of a corporation during the due diligence process. There should be clear documentation of the organization’s history of good standing, any transfers of equity, agreements between shareholders, etc. prior to completing such transactions. Once that is sorted, and the transaction is complete, there should also be a clear procedure for updating public information after the transaction.

Pending Lawsuits or Disputes – No company is immune to the threat of litigation. Conducting proper due diligence means compiling a list of any threats of litigation, active litigation cases, pending cases, and closed cases within a certain time frame. Also, a list of any arbitration proceedings should be considered.

Legal due diligence can be costly at times, but it can be a lot cheaper than discovering a huge problem down the road – after the sale has already been completed. Not every sale or acquisition is required to be put under a magnifying glass, however. This is where risk-based due diligence can be applied. The more resources a company puts into a transaction, the more extensive the review should be. This is where hiring an experienced transaction attorney can help. They will be able to advise you on what to look for during the due diligence process and the level of analysis that should be applied.

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