Due diligence documents contain information relating to a company’s assets as well as its operations and liabilities. This type of review is typically conducted prior to any merger, acquisition or other business transaction and is vital in determining the worth of the business. It also aids in understanding the risks involved in a deal by reviewing agreements, contracts and any restrictions or encumbrances that apply to assets.
In addition to looking at the physical assets of a potential company, lawyers will often examine financial documents such as federal and state tax returns along with bank statements and credit reports. They will also look at the company’s payroll, employment benefits, contracts, and organizational structure. Legal due diligence is a process that can take 30 to 60 days. The duration of the process can increase with more complex transactions.
Attorneys will also examine regulatory issues, including concerns about compliance and antitrust analysis(opens in a new tab). They might also analyze the legal landscape of the company including any litigation involving the target company or its officers.
The most crucial aspect of an investigation of due diligence in law is determining the risk for the transaction. Attorneys frequently suggest that you purchase representations and warranties insurance (opens in the new tab) to cover the purchase. This is particularly important when the buyer is not familiar with the history of the company that they are buying from. It is a way to protect the seller in the event of inaccurate representations or claims made by the buyer. The last but not least, lawyers can review any documentation related to the policies of the company’s employees such as golden parachutes and severance packages(opens in new tab) which may be affected by changes in ownership.