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  • Writer's pictureVernessa Poole

The Importance of Due Diligence

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You found the perfect fit: that company that fits the final piece of your business puzzle. You are ready to embark on a joint venture, acquisition, divestiture, investment, or other business combination, but is this new entity really as good as it seems? You can save a lot of time, money, and heartache by spending time upfront investigating the legal, financial and other business risks of the transaction.

Of course, every business combination is different, and this post does not constitute legal advice. You should consult an attorney to assist you with the particular facts of your business, the other party, and potential risks.

What are some factors to consider if I found The One?

Depth of Due Diligence

When considering a business combination, you should always conduct some level of due diligence, regardless of your role in the transaction. The extent of your due diligence will depend on a variety of factors, including:

  • The reputation and general trustworthiness of the counterparty. Here you should consider the duration and quality of your relationship with your potential new partner.

  • The potential risks and rewards. Considerations include:

    • level of financial investment, the dedication of resources, and the duration of the relationship;

    • the likelihood and impacts of potential success or failure; and

    • legal and/or regulatory implications, such as those relating to antitrust law.

If you know a lot about the counterparty based on a rich history together, and the financial, business, and legal risks of the combination are low, then you may not need to conduct a four-month-long due diligence with a team of attorneys. However, even when presented with the best-case scenario, you should conduct some responsible level of due diligence – if only as it relates to the counterparty’s finances or other key metrics.

Overhead shot of a table with business and finance documents, post it notes, laptop computers, and hands of people in what appears to be a meeting.

Sign an NDA

Regardless of how extensive or limited the due diligence is, you should enter into a mutual confidentiality agreement for information exchanged in the process.

Due Diligence Topics Covered

A good due diligence check systematically analyzes a counterparty’s strengths and weaknesses and serves to safeguard you and assess the regulatory, financial, reputational, and strategic risks posed by the potential business combination. Common due diligence subjects include a review of the counterparty’s:

  • Books and finances

  • Assets and liabilities

  • Board members, shareholders, and officers

  • Quality control process and procedures

  • Legal compliance and other company processes, policies, and procedures

  • Work in process

  • Negative press or reviews

  • Litigation

  • Active contracts

Mitigating Risks

As you can see, due diligence can help you identify, avoid and/or mitigate risks relating to a potential business combination. A good lawyer can help you significantly limit risks by helping you with:

  • Due diligence strategy, execution, analysis, and related advice; and

  • Drafting and negotiating the business combination agreements. Information (both good and bad) obtained during the due diligence process lends support to this process.

Get Legal Help Early

Two women looking at a computer image on a glass screen that says "Due Diligence" and with cells containing other business related images.

Determine the strengths and weaknesses of your counterparty and the business combination transaction sooner rather than later. Avoid expensive litigation or financial or reputational damage. Take the time now, so you don’t pay later. Your livelihood is worth it.

Let us help you build a meaningful and fruitful relationship with your counterparty. Contact us today!

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