Legal due diligence for business acquisitions

When you agree heads of terms to buy a business, the next step is usually doing your due diligence (I’m just going to say DD from not on to give the keyboard a break).

DD is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement, contract or act with another party.

The most common types of DD are financial and legal, but you can also do commercial, operational, HR, environmental and more.

In this article, I am going to cover off what legal DD is and why you need to do it.

So what is legal DD?

Legal DD involves a review of all of the targets key legal documents to identify any legal risks to the business as well as giving an understanding of the target’s contractual obligations.

Typically, in addition to financial and commercial documents, the buyer’s solicitor will compile a list of documents that the sellers must provide to enable them to perform legal DD.

These will likely include:

  • Statutory books
  • Memorandum & Articles of Association
  • Minutes of board meetings, resolutions, and shareholders’ meetings
  • Employment contracts
  • Details of litigation issues
  • Property lease documents
  • Property title deeds and title documents
  • Sales contracts and agreements
  • Supplier contracts and agreements
  • Insurance policies
  • Licensing agreements
  • Intellectual property matters
  • Pension scheme details
  • Health and safety policies
  • Accident book
  • Environmental reports
  • Permits

To be honest, I couldn’t think of anything worse than reading through page after page of contractual clauses and I am definitely not qualified to understand them.

I pass them over to my solicitor and ask them to let me know if there is anything contentious in there.

This is the advice that I would defiantly give to anyone buying a business, as;

  • It is really boring, and your time is better spent elsewhere!
  • Solicitors know what to look for and understand the language used in contracts and the risk involved so are better placed to perform this task.
  • If you use a solicitor and they miss something major, then you can bring a professional negligence claim against your them. If you do it yourself and you miss something major, then tough luck!

In summary, I would compare legal DD to having your car serviced.

You need to do it, you don’t notice anything different after it has been done but it gives you the peace of mind that you are not going to get sued for something that happened before you owned the business, the equivalent of breaking down in a contra-flow in roadworks on the M6 when it is lashing it down.

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