Avoid A Lawsuit – Due Diligence in Business Transactions
Published in BizWest’s Thought Leader column, February 2022
Businesses regularly enter mergers and acquisitions, asset purchases, stock assignments, and other types of full or partial purchases of another company. Businesses that have executed an agreement for one of these transactions may rely on the contractual representations and warranties to protect them against the negligence or dishonesty of the other side. However, when later an asset turns up missing, or financials are not as promised, the relief is to file a lawsuit – a costly, time consuming, and disruptive process to your business operations. Due diligence is important in all of these types of transactions. By performing due diligence before the execution of the transaction, the buying business can effectively avoid the lawsuit. By requiring due diligence be performed, the selling company can avoid the lawsuit. Obtaining all relevant documents in advance of the transaction not only ensures transparency and informed negotiations but is also easier. It can be challenging to recover documents down the road as people may no longer be with the business or documents may have been destroyed.
So, what is due diligence? Due diligence is a comprehensive review of a company’s formation and good standing, financial information, physical assets, real estate, intellectual property, employees and benefits, licenses and permits, environmental issues, taxes, contracts, products and services, customer information, insurance coverage and incidents, and existing litigation or litigation risks. Due diligence will be somewhat different for every company, depending on size, industry, and transaction type. Even if your business is not in the position to hire an attorney to complete due diligence for you, it is useful to discuss the transaction with an attorney to ensure that you receive all types of information that are relevant to your business and the transaction from the selling company, to build a plan to review all of the information, and to document your review to inform how you proceed with the transaction and as a record of your review in case of future concerns.
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