henever one business is considering the purchase of another, the acquiring side typically evaluates the potential target to gather information about the value and risks involved with buying the business. This process is called “due diligence” and it includes analyzing the business’ legal posture, accounting details, intellectual property and the particulars of its ownership.When conducting a due diligence on a company of any size it helps to retain an attorney with a background in business law.
Here is a description of the types of documents and information discovered and analyzed in the typical due diligence process:
Business and Individual Credit Reports
Ownership Structure and Documentation
Patents and Trademarks
Pending and Potential Lawsuits
Pensions to Current and Former Employees
There a number of business scenarios that call for a legal due diligence process. These include:
Merger and Acquisitions (Buy-side M&A)
An experienced business attorney will conduct a discovery process that includes interviews and a search of the public record. Because legal counsel are qualified to provide legal advice they can advise how the following documents or information might impact the decision to purchase, the method of acquisition and event the value of the target company.
Mergers and Acquisitions (Sell-side M&A)
Before seeking potential buyers, many principals retain legal counsel to conduct an internal due diligence of their own business. Internal due diligence investigations benefit potential sellers because the discovery process may uncover weaknesses and strengths that would otherwise first come to light in an external investigation. Having this prior knowledge gives a company the advantage of better structuring its finances, ownership, business practices and assets to be an attractive acquisition for the right buyer. Furthermore, having a due diligence memorandum or affidavit produced by a lawyer representing the sell-side saves potential buyers from investing in their own due diligence process. This frees up more capital on the buy-side and potentially may result in the buyer making a higher offer.
A due diligence investigation is also a useful internal tool to use prior to changing a company’s ownership, legal status, corporate structure, jurisdiction or core business practices. The discovery process and the legal counsel’s due diligence memorandum or affidavit creates a clear snapshot of where a business currently stands. This visibility makes it easier to make informed business decisions about what steps to take in order to lead the company to better performance in the future.
Intellectual Property Matters
Today’s technology-driven digital economy has resulted in new ways to interpret the value of a company’s patents, trademarks, copyright protected electronic content and proprietary business practices. A legal due diligence process may be used to assess the value or compatibility of a company’s intellectual property prior to its transfer from one owner to another.
In some cases, due diligence investigations may be required by underwriters of “Representations and Warranties Insurance”. This insurance protects buyers of businesses, intellectual property and sometimes products and services from losses due to falsifications, misstatements, unforeseen claims of IP ownership, omissions and errors.
Due Diligence is a highly recommended legal investigation into a business. It is ideally led by experienced corporate attorneys and can greatly reduce the risk involved with a business transaction or investment. Because every matter requires its own unique legal assessment, contact South Florida Law, PLLC for a free consultation to determine if a due-diligence investigation could benefit your business.