When a company considers a business acquisition, it is important to uncover potential problems with a target company before finalizing the transaction. To accomplish this, the buyer performs several different categories of due diligence.
Financial due diligence is a significant part of information gathering, as are marketing, human resources and insurance. While legal diligence may be smaller in volume, it is one of the most critical aspects of the process.
In finalizing the sale of a business, the seller must show documentation detailing the company’s legal structure. This includes majority and minority shareholders, the value of shares, and the identification of corporate officers.
No business owner wants to acquire a company only to discover it is in the midst of one or more significant lawsuits. During legal diligence, the seller must disclose any ongoing or potential litigation. The buyer’s legal counsel will review the seller’s client and vendor agreements, as well as leases, warranties and any other significant contracts.
The primary purpose of legal diligence is to gather information to help assess the risk associated with a business acquisition. It is also necessary to anticipate future legal problems because they could impact the purchase price or affect the decision to complete the transaction.
The goal of the due diligence process is to reveal as much as possible about the seller’s company. Though most sellers will be hesitant to reveal negative information about their company, it is advisable to disclose problems and get in front of them. Otherwise, an interested buyer may lose confidence in the rest of the information provided.