The Importance of Due Diligence

The vendor will be asked to provide a prospective buyer with the information, the buyer needs to satisfy their own due diligence inquiries and to evaluate the target business. There are a number of categories for which a vendor should collect information early in the transaction process.

The nature and form of the due diligence process will vary depending upon the transaction structure deployed by the parties, and, in some cases, the due diligence process may result in a revised transaction structure with greater benefits to the seller. Accordingly, the categories of legal due diligence will vary depending on whether the transaction involves an asset or stock sale. In general, the common categories of due diligence include the following:

  • Business information; formation or incorporation documents; bylaws or operating agreements; agreements between owners of the equity interests; up-to-date board minutes; notices for equity owner and board meetings; ledgers; equity certificates.
  • Financial records; balance sheets; income statements; annual reports; audit reports; attorneys’ letters to auditors.
  • Material contracts; customer contracts; supply agreements; loan and other financing agreements; insurance policies; employment contracts and consulting agreements; marketing and advertising agreements
  • Regulatory matters and litigation; permits etc.
  • Employment and labor matters; information regarding employees, wages, benefit plans, bonus compensation, vacation, sick time, and any benefits and policies.
  • Intellectual property; documentation supporting any copyrights, trademarks, trade names, or patents owned by the selling company or any of its key employees related to the business

The Benefits of Due Diligence

Because the due diligence process may be overwhelming and time-consuming, engaging advisers to assist the seller in its pre-transaction of due diligence information and find a solution for any deficiencies or liabilities to the greatest extent possible will make a sale transaction process more manageable for a seller, minimise the likelihood that a buyer will devalue the business, aid in the negotiating and drafting of the transaction documents and disclosure schedules, and reduce transaction costs to both the seller and the prospective buyer in the long run.


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