Legal Due Diligence: Navigating the Key Challenges and Best Practices in Business Transactions
22nd January 2025
Legal due diligence is an investigation conducted during the sale of a business to assess the legal standing and potential risks of a company that’s being sold.
The process involves a thorough review of documents and information to make sure the deal is beneficial to the buyer and uncovers any potential problems that might make them reconsider.
Whether you’re intending to purchase a business or sell your own, there are some key things to consider when entering into the legal due diligence process of the transaction.
What areas do the buyers legal team examine?
During legal due diligence, the buyer’s legal team examines several areas, including:
- Corporate Structure and Records: Reviewing the company’s articles of association and minutes of board meetings to ensure proper governance and compliance with laws.
- Contracts and Agreements: Examining all material contracts, including customer and supplier agreements, to identify any clauses that could impact the transaction.
- Regulatory Compliance: Ensuring the company complies with all relevant laws and regulations, including environmental, health and safety, and employment laws.
- Litigation and Disputes: Investigating any ongoing or potential litigation that could pose a risk to the company.
- Intellectual Property: Verifying the ownership and protection of the company’s intellectual property assets, such as patents, trademarks, and copyrights.
- Financial Obligations: Reviewing the company’s financial statements, tax records, and any outstanding debts or liabilities.
The goal of reviewing these key areas is to provide the buyer with a clear understanding of the company they’re looking to buy.
The due diligence questionnaire should be tailored to the transaction to avoid wasting time asking irrelevant questions and to ask sector specific questions key to the transaction.
What issues can arise during the legal due diligence process?
During the legal due diligence process, several challenges may arise that could complicate the transaction and introduce potential risks.
Being aware of these issues beforehand can help both buyers and sellers prepare more effectively and plan for the completion of the business sale.
Some of the common challenges faced during the due diligence process and insights on how to address them are set out below:
- Time Constraints: Due diligence will often be completed to tight deadlines, putting pressure on the seller’s and the buyer’s legal teams to quickly review and analyse many documents. Care must be taken not to miss any critical information in the responses and supporting documentation.
- Incomplete Information: Sellers might not always provide all necessary information, either by mistake or intentionally, making it hard to assess any risks. If information is lacking, additional enquiries are necessary. Sellers should aim to supply most information upfront to avoid additional costs.
- Need for Expertise: Certain aspects of due diligence, such as intellectual property or regulatory compliance, may require specialist legal expertise.
- Poor Record Keeping: Due diligence can be labour-intensive, especially when manual methods and outdated systems are used. Sellers should ensure that records and documents are easily accessible, demonstrating that the business is well-organised and ready for sale.
- Poor Communication: Effective communication between the buyer and seller, as well as within the legal team, is important. Miscommunication can lead to misunderstandings, delays, and errors in the due diligence process.
- Unplanned Costs: Unexpected issues discovered during due diligence can lead to additional costs, either to address the issues or to renegotiate the terms of the transaction. These challenges highlight the importance of thorough preparation ahead of selling your business.
Being aware of these challenges and acting quickly to resolve them can significantly enhance the efficiency of the due diligence process, paving the way for a smoother transaction for both sellers and buyers.
How can Myers & Co help?
At Myers & Co, we understand the complexities and challenges involved in the legal due diligence process.
For further information, please contact Joanna Convey Commercial Solicitor at Myers & Co on 01782 491025 or email joanna.convey@myerssolicitors.co.uk. Myers & Co has an office in Stoke-on-Trent, Staffordshire.
