In a merger or acquisition, the due diligence phase is indispensable. It is the process where the buyer thoroughly investigates the target company for legal, financial, and operational risks. Without proper due diligence, you risk taking over hidden problems, which can lead to significant financial losses and legal disputes.
What does legal due diligence cover?
Our approach involves a systematic review of all relevant documents and contracts. This includes:
- Corporate governance: Articles of association, shareholder agreements, and minutes of board meetings.
- Contractual obligations: All ongoing contracts with customers, suppliers, employees, and financiers.
- Intellectual property: Checking the validity and ownership of patents, trademarks, and copyrights.
- Legal disputes: Current and potential lawsuits or arbitration cases.
A recent case involved an acquisition where our due diligence uncovered a hidden warranty obligation in an old supplier contract. This obligation nearly caused the transaction to fail, but by identifying it early, we were able to resume negotiations and agree on an appropriate price adjustment.
"Due diligence is not just ticking off a checklist; it is understanding the story behind the numbers and contracts to map the true risk profile of the transaction."
Practical tips for entrepreneurs
Even before you engage an advisor, you as an entrepreneur can do preparatory work:
- Organize documents: Ensure all company documents are up-to-date, complete, and well-organized.
- Map out debts: Be transparent about all financial obligations and loans.
- Inventory key contracts: Identify contracts with 'change of control' provisions that could block the acquisition.
A well-executed due diligence not only provides protection but also creates clarity and trust between both parties, laying the foundation for a successful collaboration after the acquisition.