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Due Diligence
A prospective buyer of a business will carry out due diligence on the business and assets which are the subject of the transaction. This process usually covers commercial, financial (including tax) and legal due diligence.
Legal due diligence usually begins with the buyer issuing an information request list for the seller to answer and provide copies of requested documents. This section includes a template legal due diligence checklist and a standard form of legal document review.
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What is legal due diligence?
Potential buyers of a business carry out due diligence on the business and assets being acquired, covering investigations into commercial, financial, tax and legal matters.
The due diligence required for the acquisition of a business is likely to be less extensive than the due diligence for a company acquisition. A company acquisition will mean that the buyer, through the acquired company, will take on all the liabilities of the target company, including both known liabilities (for example, obligations to perform contracts) and unknown liabilities (for example, unpaid tax and liability for past breaches of contracts or legal requirements). In the case of a business acquisition, a buyer is more able to choose whether or not to assume responsibility for the obligations and liabilities of the business and assets being transferred.
In legal due diligence, the buyer (or its advisers) presents the seller with a set of inquiries for them to answer and to provide requested or supporting documents. The buyer will then ask any necessary follow-up questions.
The buyer typically looks for warranties in the Business Purchase Agreement covering the accuracy and completeness of the answers and documents provided during the due diligence process. Care should be taken in answering the requests, to avoid potential claims for breach of warranty and misrepresentation.Â
The replies and materials provided should also serve as the basis for the specific disclosures to be made by the seller under in the disclosure letter which will accompany the BPA.
How are issues arising during due diligence dealt with?
Issues identified during the due diligence process can be addressed in several ways:
- renegotiation of transaction terms: this may involve adjusting the purchase price or holding back some of it until an issue has been resolved
- pre-conditions to transaction: the buyer may require the seller to complete certain actions before the sale, such obtaining legal consents necessary for the transfer of specific assets to be acquired
- warranties or indemnities: the BPA may be changed to include specific warranties or indemnities covering the relevant matter, allowing the buyer to claim damages or losses if they are breached
- withdrawal: if the issue is significant and cannot be resolved satisfactorily, the buyer may decide to withdraw from the transaction
