Legal DD

UNDERSTANDING LEGAL DUE DILIGENCE IN M&A 

Due diligence, and legal due diligence in particular, can make or break an M&A deal. As an essential legal review of documents and information, it can enable both the buy and sell-side to identify potential liabilities and understand any legal risks. 

Here, we’re going to discuss the basics of this type of due diligence, how long it takes and what information needs to be gathered. We even provide a checklist so you can be totally ready, whether you’re buy-side or sell-side.

• Legal due diligence is the process of collecting and assessing all of the legal documents and information relating to the target company. It gives both the buyer and seller the chance to scrutinize any legal risks, such as lawsuits or intellectual property details, before closing the deal. By understanding the target company and any potential liabilities, both parties can make an informed decision in the M&A transaction.

• How to perform legal due diligence 

• To perform legal due diligence, the following will need to be scrutinized:

• Contracts (customer, supply, operating and employee contracts and licenses)

• Leases

• Pending and potential lawsuits

• Intellectual property

• Property and tax liabilities

• Environmental laws

• Representations and warranties

• Organizational documents (company by-laws, limited liability agreements, stockholder agreements)

LEGAL DD SELL-SIDE

Legal due diligence is not only beneficial for the buyer, but also for the seller. As the seller, it enables you to identify the worth of your company and prepare it for sale. This is especially crucial since nearly half of deals fail due to issues surfaced during the due diligence process. If the sell-side can perform due diligence on their own company first, issues can be identified and rectified before a buyer or investor gets involved.

The result for the buyer is a more streamlined, less frustrating process. For the seller, it often equates to a higher value deal.

LEGAL DD BUY-SIDE

For the acquiring company, the benefits of this type of due diligence are four-fold. First, it enables the buyer to understand the target company and its operations. This then aids the buyer to not only determine a fair purchase price, but helps to prepare a strong M&A contract. 

And most importantly, with a thorough understanding of the target’s potential legal risks and liabilities, you can make an informed decision and avoid falling into hot water later down the track.

HOW LONG DOES THE LEGAL DD PROCESS TAKE?

Due diligence investigations take around 1-2 months. This is usually how long it takes for the buyer to complete a thorough evaluation of the business, including all the legal aspects.

However, the process can be extremely time-consuming and drag on if the seller goes into the deal unprepared. This is why always-on readiness is essential to a successful deal.