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The Importance of Public Records in Evaluating a Business Purchase

When you’re considering purchasing a business, it’s important to do your research. One crucial aspect of due diligence is evaluating the public records of the business you’re interested in. These records can provide valuable insights into the company’s financial health, legal history, and more. In this article, we’ll explore the importance of public records in evaluating a business purchase.

Financial Records

Financial records are perhaps the most important public records to review when considering a business purchase. These documents can give you insight into the company’s revenue, expenses, profit margins, and more. You’ll want to review financial statements from at least the past three years to get a sense of how the company has been performing over time.

One key document to review is the balance sheet, which provides a snapshot of the company’s assets and liabilities at a given point in time. You’ll also want to review income statements and cash flow statements to get a sense of how much revenue the company is generating and where that revenue is going.

Legal Records

Another important set of public records to evaluate are legal documents related to the business. These might include lawsuits or other legal disputes involving the company, as well as any regulatory or environmental violations.

You can usually find these documents by searching online court databases or contacting local government agencies that oversee businesses in your area. Reviewing legal records can help you identify potential liabilities or risks associated with purchasing the business.

Ownership Records

Ownership records can also be valuable when evaluating a potential business purchase. These documents show who owns the company and how ownership has changed over time.

You might also want to review any agreements between current or former owners that could impact your purchase decision. For example, if there’s an agreement that gives one owner veto power over major decisions, that could impact your ability to run the business as you see fit.

Marketing and Sales Records

Finally, it’s important to review marketing and sales records to get a sense of how the company has been promoting itself and attracting customers. This might include analyzing advertising campaigns, reviewing sales reports, and looking at customer reviews online.

By examining these records, you can gain insight into the company’s brand reputation, customer base, and potential for growth in the future.

In conclusion, reviewing public records is a crucial part of evaluating any potential business purchase. By examining financial statements, legal documents, ownership records, and marketing materials, you can gain a comprehensive understanding of the business you’re considering. Doing your due diligence upfront can help you make an informed decision and avoid costly mistakes down the line.

This text was generated using a large language model, and select text has been reviewed and moderated for purposes such as readability.

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How to Prepare a Legal Due Diligence Report of a Company?

Legal due diligence report refers to taking all necessary measures to protect one's interests in a certain transaction. The deal could involve buying or selling real estate, signing a contract, etc.

How to carry out due diligence.

A legal due diligence report investigation involves reviewing documents and interviewing employees to gather information about a business. In order to buy or invest in a business, a legal due diligence investigation is conducted.

Every day, we encounter several business transactions. Millions of dollars are invested by individuals to buy an entire firm. If one is unfamiliar with commercial transactions, he may have puzzled about how people in the industry trust firms with their millions of dollars. Without a doubt, investing such significant sums takes time. Investors or businesses conduct an extensive study before investing even one hundred rupees. “Due Diligence” is the term used to describe this inquiry.

The term “ legal due diligence ” describes the procedure of examining and recording a company’s financial, legal, and compliance issues. Before making an investment or receiving funds, the investor particularly looks for regulatory and procedure compliance. The phrase “ due diligence ” describes the practice of thoroughly investigating something before acting. It is applied in several business transactions, each having its guidelines for performing background research and compiling the results into a report. Depending on the purpose of the report and the topic under investigation, its size and scope will change. 

Due Diligence Is Generally of Three Types:

Firm due diligence.

Firm due diligence entails a thorough investigation of the parties to a transaction, the chance that the business will succeed in the future, and the quality of the investment.

Financial Due Diligence

Financial due diligence is a crucial step in which the business’s operation, financial, and commercial prospects are confirmed. It provides the purchasing company with a clear picture of whether the purchase is worthwhile or not. It entails a thorough examination of the following: internal controls, tax compliance, audit procedures, and accounting policies.

Legal Due Diligence

It focuses primarily on a transaction’s legal ramifications. It searches for any legal hazards or warning flags. Both intra-corporate and inter-corporate transactions are typically included.

When a company or an interested investor wants to purchase or invest in a firm, a legal due diligence  examination is carried out. To ensure that the purchase or investment is advantageous, a legal due diligence investigation is conducted to gather information about the company. All relevant information and prospective liabilities are revealed during the investigation. A decision can be made with knowledge once the information has been gathered and examined. 

Why Is Legal Due Diligence Significant Nowadays?

Due diligence in legal matters is crucial for many reasons, but it’s most crucial for making wise business judgments. The reasons for this include:

• Respect for the law is essential. The counterparties to the transaction are required to abide by all applicable laws and statutes and other legal obligations. The responsibility to ensure that the legal criteria have been met is on the parties. For example, a buyer needs to confirm that the developer has the relevant permits to build the residential apartments.  
• Nearly every industry is experiencing a rise in fraud. Scams involving impersonation and fraud involving forged documents/title deeds are common in real estate transactions. Precautions can be taken in this situation to prevent loss. Therefore, a specific level of care is justifiably expected. 
• Another crucial area in which the party must pay attention is documentation. Forgery and impersonation fraud is on the rise. It becomes even more crucial to thoroughly examine the documents and confirm their veracity.  

Tools Regarding Legal Due Diligence

After realising the value of legal due diligence, the question of how to go about completing it and what tools to use arises. Due to the extremely complicated nature of both international and local economic transactions, no one analytical method can be recommended as such. One approach is to ask the target organisation a series of questions about its overall financial situation business hazards, and risk management practices. Another method is to ask the vendor to make representations and guarantees in the business contract. The third approach involves examining the financial report of the seller’s company along with the examination of the legal concerns involved in the deal.

Report on a Company’s Legal Due Diligence

Depending on the audience it is intended for, this report  can take on a variety of formats. However, a legal report of due diligence frequently includes the following information:

• A statement outlining the research topic
• Documents that support the research, including market research, corporate reports, legal records, and transaction copies
• An examination of the proposal’s strengths, opportunities, weaknesses, and threats is known as a SWOT analysis
• Information on any debts, liabilities, or other financial commitments that could impact the conditions of any business deal
• Statistics and other information, such as market research, inspection results, valuation reports, surveys, and occasionally public feedback.

Procedure for Exercising Legal Due Diligence

It   can be carried out in two different ways. Data submitted in answer to the acquirer’s questionnaire; predetermined data presented in a “data room” by the seller/target company. A significant volume of data is offered to interested parties using the data room method so they can examine, evaluate, and perform due diligence on it. Huge data are presented here. The tender process has had success with the data room method for disinvestments. By using this procedure, the vendor can maintain assurance that each bidder is given equal treatment and access to the same information or data. As a result, the information and papers provided to all bids are preserved similarly.  

After that, lawyers will prepare a legal report of due diligence that can be used to negotiate the tricky issues surrounding the warranties and representations that should be included in the purchase and sale agreement or financing contract, the disclosures that must be made, and the amount, if any, that should be set aside in escrow.  

Conclusion 

The business transaction is just as significant as a legal report of due diligence. It should be carried out with the utmost care. The report should contain all pertinent information. With different transactions, a report’s various components change. Therefore, a report includes all of the significant outcomes of a legal due diligence procedure. Additionally, it improves the investor’s perception of the company under investigation. A thorough legal report of due diligence that is well-documented is an addition to the decision-making process.

Thus, a legal report of due diligence becomes crucial to a deal. Drafting a Legal due diligence report can seem like a daunting effort, but with the correct procedures and checklists, the task can be made simpler.

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How to create a due diligence report: A guide for compliance professionals

Due diligence is a mission-critical process for any organization. A due diligence report consolidates all the information you uncovered during that process so you can make strategic decisions about potential vendors, third parties and even mergers and acquisitions. Understanding how to create an in-house due diligence report is an important step that helps your board make better decisions.

Here we aim to help you better understand the following topics:

• What a due diligence report is
• Who provides due diligence reporting
• What a due diligence report should include and how to write one
• The difference between reports completed by in-house compliance teams and those provided using due diligence technology

What is a due diligence report?

A due diligence report is a summary of the due diligence process. In it, risk and compliance teams will detail the research they completed, the information they uncovered and recommendations for how to proceed with the business relationship.

Based on this due diligence report definition, a thorough report will give executive teams the insights they need to make a strategic decision about the new entity. This can help your organization avoid breaches, leaks and exposure to  bribery and corruption .

Essentially, every time you complete due diligence, you should also complete a report. The report's contents may vary based on whether it’s for a  merger or acquisition , a  third party  or, increasingly, for  data privacy .

Who can provide a due diligence report?

There isn’t one group or team responsible for due diligence reports when you’re creating them inside your organization. The risk and compliance team is typically involved, but different teams within the enterprise should lend their expertise to ensure the report is as thorough as possible. For example, if you’re completing  cyber due diligence , you should include your cybersecurity teams, as they’ll know what to look for.

Many organizations also outsource their reports to external advisors or services.

What should your report include?

A due diligence report aims to recap the process and help your organization use that process to make a strategic decision. With that in mind, most data from due diligence should be in the report. This includes:

• Financial information:  Compile the company’s financial statements, tax returns and relevant documents from its accounting team, as well as any loans or debts.
• Employee information:  Focus on in-depth information about the third-party, relevant details on vendor contacts or profiles on key leaders involved in a merger or acquisition. This is more important than it may seem since  90% of successful deals  effectively identified and targeted essential employees.
• Asset information:  Describe anything the organization owns, from property and machinery to intellectual property.
• Partner information:  Include information on any vendors  or third-party partners that the organization works with. Their  supply chain  can introduce risks to your organization, so you must cover as much detail here as possible.
• Legal information:  Explain any potential legal issues. This includes lawsuits and any existing contracts, permits or licenses.

What should a due diligence report look Like?

There is no single standard for what a due diligence report should look like. The appearance of your report may vary based on the type of due diligence you’re performing, as well as the nature of the business relationship.

Understanding the structure and content of a due diligence report by reviewing a template or examples can help investors better understand the structure and content of these reports. Thus, aiding the preparation for their own due diligence investigations or reviewing reports prepared by others.

Viewing sample due diligence reports can also contribute to identifying critical areas of risk and opportunity associated with an investment opportunity, which can help investors focus their due diligence efforts on areas that are most likely to impact the success of their investment.

How to prepare your report in 5 steps

A due diligence report organizes and presents the information from due diligence in a format accessible and useful to the C-suite. Many organizations follow a  checklist .

To prepare a due diligence report, start by collecting all information and documentation from due diligence, then complete the following steps:

• Write an executive summary:  This should explain the company you investigated and the process you followed, as well as key learnings from the process.
• Include documentation:  Provide documentation that supports your investigation. This can vary based on the type of due diligence but may be legal documents, corporate reports, financial statements, etc.
• Complete a SWOT analysis:  Analyze the business agreement alongside information collected during due diligence to provide strengths, weaknesses, opportunities and threats associated with the partnership.
• Explain any legal information:  Focus on any legal issues that could impact the partnership. This includes any existing debt, liability or financial responsibilities.
• Provide statistics:  Data can provide a brief snapshot of the due diligence process. Include any surveys, analyses, market research or key data points you uncovered during your investigation that might help your CEO make an informed decision.

Can due diligence tools enhance your reporting?

In short, the answer is yes.

While certain aspects of due diligence reports can only be completed in-house, for many compliance teams, the task of completing due diligence and creating and maintaining accurate, up-to-date reports can be time consuming and risky.

Oftentimes organizations find themselves in at least one of the following scenarios:

• Inadequate resources for vetting large numbers of third parties
• Inaccurate or incomplete information due to an over-reliance on self-disclosures and manual searches
• Reports lack depth in areas where the largest risks are posed

The good news is technology can help overcome these challenges to provide more comprehensive information with greater reliability for improved risk analysis, which translates to better business decisions.

Build a more effective due diligence program

Due diligence should be reliable, scalable and effective. Yet, the sheer amount of information and the number of teams involved in both due diligence and its reports can make it difficult to coordinate this effort — even with a thorough due diligence report process in place.

Due diligence services can streamline this process for you by offering a global team of analysts and investigators, risk-based assessments and critical business insights that can be difficult to uncover on your own.

Due Diligence Services from Diligent deliver the intel you need in a format customized to your business, all of which includes real-time insights using Global Database Check (GDC) and comprehensive online research. 

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Due diligence report for m&a & how to create one properly.

Due diligence is one of the most vital components of valuing and finalizing an investment.

It presents buyers and sellers with a comprehensive look at potential investments, themselves, or a buyer.

The final product of due diligence is a thorough report that summarizes the process and supplements the decision-making.

At DealRoom we help dozens of companies organize their due diligence process and in this article, we explain due diligence report fundamentals, detail due diligence questionnaires, and show how DealRoom streamlines the diligence process .

Download Due Diligence Sample Report

Organizing all of the loose facts and data gathered from due diligence into a clean report can seem rather daunting.

Luckily, we’ve compiled a sample due diligence report to follow whether the investigation was routine or for merger or acquisition.

Download our free due diligence checklist and get an understanding of what to include in your due diligence report.

What is a Due Diligence Report?

Writing a due diligence report is typically the next step that follows the investigation process. After excavating all of the necessary information from rigorous research and investigations, you must compile the results into an organized document. A due diligence report is essentially a document that contains a detailed summary of the due diligence process and procedures.

What Should Be in a Due Diligence Report Checklist?

Virtually, every essential detail of the process should be included in the report. Exact details typically vary depending on the type of due diligence, the investment, and the deal at hand.

Nonetheless, listed are some core items that should be included in the report:

• Information on the finances of the company. This includes financial statements for past years, tax returns, and documents from accounts receivable. If there is no separate section for loans and debts, then they should fall here automatically.
• Information about the company's employees . This catalogues information on the people holding pivotal positions in the company and their work experiences. It may also house data on retired employees too and their pension details.
• Information on the assets of the company. This includes material on the company’s different facilities, machinery, and intangible assets such as intellectual property or copyrights.
• Information on partners, suppliers, and customers. This details more about the different parties in the firm’s supply chain and their relationships with them.
• Legal information about the company. This refers to items such as historical and outstanding lawsuits, contracts, licensing, and permits.

Why Do We Need to Make a Report?

This report captures the findings of the diligence process. In turn, it allows investors to have a more clear understanding of the investigated firm.

A complete and well-documented report supplements the decision-making process for investors and business considering finalizing deals and contracts. Additionally, it substantiates forecasts for the target company’s future and lifespan .

Take businesses ' A' and 'B' for example.

Business 'A' has done its financial due diligence and has its report. On the other hand, business 'B' has not completed any due diligence or a report.

Assume that both businesses require loans from the bank. Business 'A' can refer to their due diligence report and precisely predict how long it will take to repay the loan. They can more accurately discern what to do with the loan to yield the most effective and efficient results.

Business 'B' , on the other hand, can only make loose assumptions and estimations. Without background knowledge, these assumptions and estimations run a higher likelihood of being incorrect.

How to Write a Due Diligence Report

Writing a due diligence report may seem as intimidating as the research portion of the investigation.

The following considerations will keep you on track when drafting a report, but remember no two will be exactly the same: don’t include everything, know your audience, use a due diligence report template, reread and revise.

More Details:

• ‍ Don’t Include Everything. There is certainly a temptation to include all of the information the diligence team has gathered; however, this is not only a nearly impossible task, but also a waste of time as the executives reading your report will not have the time to work through such a cumbersome text. Focus on your company’s objectives (why is it engaging in M&A?) and the objectives of the report.  ‍
• Know Your Audience. Building off the previous point, you must keep your target audience in the forefront of your mind when writing. Most likely it will be your CEO, or perhaps your CFO, reading the report; he/she is very busy and will only want to read information relevant to making a sound decision on the deal. Again, aiming to be clear and concise will help your audience work through the report with ease and absorb the critical information. This being said, you might consider including an “Executive Summary” section in your report for additional C-suite level executives (or members of the board of directors) to utilize if they do not have time to digest the full report.  ‍
• Use a Due Diligence Report Template. Clearly, one of the best tips or strategies for writing a due diligence report is to use a due diligence sample document or a due diligence report template. These resources will support you as you write. While the internet is cluttered with resources related to M&A practices, it should go without saying, you will want to use a technical due diligence report template created by actual M&A practitioners.  ‍
• Reread and Revise (edit, edit, edit!). As with any written work, what happens after you finish your draft is of the utmost importance. Editing will help ensure you accomplish the first two guidelines of not trying to include everything and knowing your target audience. As you revise, ask yourself if the information is related to: the operation of the company, the purchase price or purchase agreement, risks (with the company’s operations, legal standing, or retention of key personnel), and critical financial information.

Suggestions for Writing a Due Diligence Summary Report  in a Right Way

Compiling a due diligence report may seem as intimidating as the research portion of the investigation. An improper, carelessly made report could throw away all of the work done to this point.

Outlined some suggestions for a solid, investigative report:

• Be patient, thorough, and attentive to details . The process is going to take time. A suitable report cannot be tossed together at the final hour. To fully reap the reports’ benefits, you will need to be at thorough as possible when logging your findings. Without a comprehensive report to refer to, it is almost like you just threw away the previous painstaking investigations and research.
• Don’t lose focus on what’s important. With that being said, ensure you are writing about relevant subject matter. While the information you are handling may be overwhelming, you want to stick to what the report is actually on. For instance, if you are writing a customer due diligence report, you don't need to dwell much on a business’ liabilities.
• Be concise. Likewise, you don’t want the report to go on and on and on. Investors would likely not want to read through every minute detail, thus defeating the purpose of the report.  
• Ask questions. You want to believe that a seller is honest. However, it is not uncommon for them to fluff information in the confidential information memorandum (CIM). Anytime you see something that looks off, ask questions. Additionally, you should interview people that are not directly related to the transaction for a more holistic view of a firm.
• Seek legal assistance. Unless you are an attorney, property manager, or investments manager, you should seek legal help and advice. This way, you negate the possibility of running into law, jurisdictional, or compliance issues down the line.

How Much Does A Due Diligence Report Cost?

With no two deals being exactly the same, costs related to diligence can vary. Many practitioners feel diligence costs should not exceed about 5% of the purchase price .

When it comes to the report itself, there are functional free due diligence report templates and sample documents online.

Additionally, fees for producing reports can vary depending on the industry and country.

Types of Due Diligence Reports

The areas of concentration for the report is dependent on what type of due diligence you are utilizing.

For example, a report resulting from financial due diligence will look and have different information versus one from customer due diligence .

Likewise, a financial due diligence report created for administrative purposes will differ from those written in preparation for mergers and acquisitions.

You wouldn’t expect an administrative due diligence report to contain more information on customers than the administration of a business.

When performing hedge fund due diligence, you would assess a reservoir of investment funds and the general partners who own it.

Therefore, there are as many different types of reports as types of due diligence itself. Each corresponding report type has distinguishing properties and format.

Some examples include:

• Financial Due Diligence Report
• Human Resources Due Diligence Report
• Hedge Fund Due Diligence Report
• Customer Due Diligence Report
• Legal Due Diligence Report
• Operations Due Diligence Report
• Vendor Due Diligence Report
• Due Diligence in Mergers and Acquisitions (M&A) Report
• Administrative Due Diligence Report

Who Creates the Report?

Due diligence summary reports are generally compiled by a company’s internal due diligence team or a paid third-party group. Your team may comprise of attorneys, financial consultants, and any subject matter experts that pertain to the seller.

Overall, the collective expertise should encompass the various business, legal, technical, and financial matters respective to the deal at hand. However, in smaller-scale instances, such as buying a small business, may not require more than one or two professionals.

Conducting due diligence, creating, and reviewing the report should be a team effort .

Meaning, if contracting with an external party, you should not entirely outsource them. Some information may not be meant for them. Internal employees should also be involved in the process.

Most importantly, you need to be certain that the individuals on your team are people that you trust, service agreements aside. The last thing you want is to be left with a faulty investment because of a team’s lackadaisical diligence.

What is a Due Diligence Questionnaire?

A due diligence questionnaire is a list of investigative questions that is forwarded to the selling company to glean information. Depending on the type of due diligence, it may also be sent to their partners, suppliers, and even customers. The questionnaires should be highly detailed and in-depth.

They should prompt for pertinent information to provide an overview and duly supplement the analyse associated with due diligence.

Before an investment manager or potential buyer starts delving into a business’ secrets, they must sign a Letter of Intent (LOI).

This contractually displays interest in buying or investing in the firm or private equity, however, it is not binding.

Why do You Need a Due Diligence Questionnaire?

Due diligence questionnaires are an essential early step in the process. The questionnaire serves as a means of obtaining the information you need. It offers the party handling the process foreknowledge of what to expect and how to go about it.

Additionally, it will help those executing the process know what to concentrate on and safeguard against misplacing priorities.

Furthermore, due diligence questionnaires, just like the due diligence report, are contingent upon what is being investigated. For example, buy side due diligence questionnaire should be somewhat different from an acquisitions due diligence questionnaire.

Due Diligence Questions when Buying a Business

By asking the right questions, a prospective investor or buyer will be on the path of well-performed due diligence. Below are some questions that you should be sure to ask the seller when purchasing a firm:

• Why is the company being sold? This should always be asked during potential acquisitions. In some cases, the liabilities of the company are getting too much for the current owner to bear.  If you uncover why the company is being sold, you can better decide if the company is still worth buying. This question may not be relevant in all circumstances. For example, investors or stock purchasers may not need to have this question answered. ‍
• What are the major commodities of this company? As a potential investor or buyer, you should know what commodities generate most income and losses for the company.  This can help you pinpoint areas of improvement and where you should try to maintain prosperity. ‍
• What are the major markets for these commodities? You will need to know which markets that the company is positioned in to remain competitive. Additionally, you need to understand their customer, client, or member base. It will allow you to better strategize and make key decisions for the company while still putting the market in mind. ‍
• Are the revenues generated by the company enough to keep it running? If not, are there potential partnerships or sponsorship that can be secured? The last thing you want is the profit line plummeting five months after acquiring or heavily investing in a company. ‍
• Is the company positioned for expansion? Is expansion even possible? After acquiring a company, you don’t want it to sit stagnate. In areas where the company doesn't already sell, you want to know what your chances are at expanding there. ‍
• Are there any distinguishing product features that are very important to the sales of any products? Are there any intellectual properties worth protecting? You will need to know what drives a company’s competitive advantage and what unique company property must be secured. ‍
• Are there any ongoing or suspended legal proceedings? Licenses and permits? Some companies find themselves in legal situations that are almost impossible to recover from. You do not want to acquire a firm that is pervading with legal issues and have to suffer the consequences. Likewise, you need to be attentive to applicable licenses and permits for proper upkeep.

Get Due Diligence Questionnaire

You can utilize a due diligence questionnaire on a DealRoom's platform. Our M&A lifecycle management software includes a variety of pre-built ready to use questionnaires to help teams start due diligence process easily and without time waste.

Visit our playbooks gallery to find a questionnaire you need.

Final Words

Due diligence is just as important as the deal itself and should be done as meticulously as possible.

Utilizing tools, such as DealRoom’s due diligence management software, helps teams complete due diligence summary reports thoroughly and accurately.

With DealRoom, you can:

• Create diligence tasks list
• Fullfill tasks and share critical information with team members
• Assign users to key diligence roles
• Track real-time diligence progress
• Securely store and manage all documents and files

DealRoom is easy to use. You can populate DealRoom with your due diligence folders and create due diligence lists right inside the room, instead of sending the due diligence list separately to your clients.

- Ovais A., Investment Banking Associate

DealRoom is a functional due diligence software that helps streamline the process. Traditionally, you would find yourself creating folders within a software and then separately forwarding the due diligence list to clients.

With DealRoom, you are able to seamlessly populate due diligence folders and create lists within the same room.

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A due diligence report is key to finalizing an investment, merger, acquisition, or legal agreement. The due diligence report offers a comprehensive exploration and explanation of a property, a company’s financial records , or a company’s overall standing in the marketplace.

The information in a due diligence report varies depending on the industry and the purpose. If two companies are partnering, both parties will provide an M&A due diligence report. On the other hand, a financial institution may create a customer due diligence report to determine the potential risks a customer may pose to the bank. 

Who Writes a Due Diligence Report? 

The people who participate in the due diligence process, likewise, vary based on the type of due diligence report. In general, stakeholders in the deal will contribute their knowledge, as well as subject matter experts within the organization. 

Often, a company will have a due diligence team that will spearhead the research, organize the data, and write the report. A company’s attorneys will also play a role.

Sometimes, companies will bring in a third-party organization to assist with the due diligence process. If you choose this option, it’s important for your own attorneys, company stakeholders, and subject matter experts to collaborate. Due diligence shouldn’t be fully outsourced. 

What Is a Due Diligence Questionnaire? 

A due diligence questionnaire helps guide the investigation process, where parties gather information to compile the report. You will present the due diligence questionnaire to the other party in the deal, so they can answer questions that will help you complete your due diligence report. 

The questionnaire may also go out to customers, partners, or suppliers, depending on the investment or deal in question. In each case, it will present different questions .

You can download due diligence questionnaire templates and then customize them for your particular needs, whether you are doing M&A due diligence, due diligence for real estate, or due diligence if you’re purchasing a business. 

What To Include in a Comprehensive Due Diligence Report

In broad terms, your due diligence report should begin with an introductory statement describing the purpose of the report: 

• Is it to find investors or secure funding? 
• Is it to initiate a sale, merger, or acquisition? 
• Is it to invest in property? 
• Is it to go public with a company?

The purpose of the report will drive its structure, the research needed, and the data presented. Across most industries, a comprehensive due diligence report should include the company’s financial data, information about business operations and procurement, and a market analysis. It may also include data about employees and payroll, taxes, intellectual property, and the board of directors . 

Your Complete Due Diligence Checklist

Your due diligence report can help determine a company’s valuation and enable investors, business partners, and other stakeholders to make educated decisions regarding the company’s future. 

Following a due diligence checklist can ensure your due diligence report:

• Conveys all the information necessary for educated business decisions
• Is easy to follow
• Is factually accurate
• Supports all financial data with background materials or supporting documentation

When you first begin putting together your due diligence report, review the following due diligence checklist to ensure you’re including all the necessary elements: 

• Financial statements, including balance sheets, cash flow statements and profit & loss reports
• Company valuation 
• Capital structure
• Financial projections
• Products or services
• Capital assets
• Real estate assets
• Company structure
• Listing of officers/Board of Directors
• Intellectual property (patents and trademarks)
• Legal documents
• Tax information
• Inspections
• Employees and payroll
• Procurement data
• List of suppliers
• Agreements (including licensing, distribution, or franchise agreements) 
• SWOT analysis
• Relevant market research and data
• Policies and procedures

How To Write a Due Diligence Report 

Due diligence reports may be a combination of financial statements, spreadsheets, written reports, pie charts and bar graphs. Make sure to present the information in a clear and compelling way — with illustrations that can help readers more readily grasp the relevance of your data. 

In addition, the information should be comprehensive. For instance, financial reports should be accompanied by background information and in-depth analysis that will help parties better understand the data presented. 

While a due diligence report can get unwieldy with so many must-have items, it’s also important to keep it concise and engaging. When you’re writing a due diligence report, stay on target. That means keeping the information most important to your audience at the forefront. 

At the same time, you don’t have to include everything you found during the investigative process. Focus on the relevant information that can help stakeholders make the best decision for the company’s future. 

Finally, remember to re-read and revise as needed. You don’t want to wait until the last minute to put your due diligence report together. Leave plenty of time to review your work for errors, revisions, and improvements  — as making a mistake at this stage can be detrimental to closing a deal. When you can share information in fewer words, or even with a chart or illustration, do so. 

How To Write a Due Diligence Report Summary 

Your due diligence report summary is the final stage — before sharing your report, of course — in the due diligence process. 

A due diligence report summary shares the highlights of the due diligence report and lets readers know what to expect. It also outlines the due diligence process and how the information in the report was uncovered. If there are any areas of concern or exceptional details, your due diligence report summary should highlight these. 

Types of Due Diligence Reports

Many industries and professionals use due diligence reports of different types to assess investment opportunities or improve operations, processes, and results within the organization. Below are a few industries that regularly rely on due diligence reports, along with other types of due diligence reports useful in various businesses. 

M&A Due Diligence Report

If a company is undergoing a merger or acquisition , planning an IPO, or considering an expansion, a business valuation is necessary for better decisions. An M&A due diligence report should cover financial statements and projections, capital structure, and a SWOT analysis, or an exploration of the company’s strengths, weaknesses, opportunities, and threats in the marketplace. 

Real Estate Due Diligence Report

Real estate investors and developers use due diligence reports to determine the environmental impact of a project , the potential profitability of a property, the CAP ratio, expected vacancy rates, and capital improvements that may be needed. 

Other Situations Requiring a Due Diligence Report

Other professionals, industries, and situations also rely on due diligence reports. Some examples of other types of due diligence reports include 

• Human Resources Due Diligence Report
• Vendor Due Diligence Report
• Commercial Due Diligence Report
• Administrative Due Diligence Report
• Customer Due Diligence Report
• Financial Due Diligence Report
• Technical Due Diligence Report
• IP Due Diligence Report

How a Virtual Data Room Makes It Easy to Compile and Share a Due Diligence Report

CapLinked makes it easier to compile your due diligence report by enabling your staff to securely share and organize all of the data needed to create the report. They can also track changes in files, manage file permissions, and even revoke access after download. Each department can focus on the aspects of the report they need to contribute while collaborating in real-time across departmental silos. 

Tracking and managing documents that belong in your due diligence report through a cloud-based virtual data room can help readers absorb the information more easily, keep track of what they’ve already reviewed, and make comments and questions for follow-up within the files. 

When it comes time to share your report, CapLinked makes it easy and intuitive. Start your free trial today ! 

Dawn Allcot is a full-time freelance writer specializing in business, finance and technology.

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Legal Due Diligence: Everything You Need to Know

A legal due diligence investigation is done to ensure that the investment or purchase of a business is beneficial by revealing potential liabilities. 11 min read

Updated Ocotber 16,2020: 

What is legal due diligence.

Legal due diligence is an investigation into a business by re viewing documents and interviewing employees. A legal due diligence investigation is completed when a business or investor is interested in buying a business or investing in that business.

A legal due diligence investigation is seeking information about the business to make sure that the investment or purchase is beneficial. The investigation seeks to reveal all important facts and potential liabilities. Once the facts are collected and analyzed, an informed decision can be made.

There are subcategories of legal due diligence. These subcategories seek more specific pieces of information.

Intellectual property due diligence

Business due diligence

Accounting due diligence

Due diligence is most often performed in preparation for a merger, acquisition, licensing , or other transaction.

Due diligence seeks to understand all of a company's obligations. This includes:

Pending and potential lawsuits

Long-term agreements

Distribution agreements

Compensation

Why is Legal Due Diligence Important?

Legal due diligence is important for many reasons, but most importantly to make informed business decisions.

Understand Your Own Business

Legal due diligence is commonly thought of an investigation performed by one company on another company. Legal due diligence can also be an investigation into your own company.

A legal due diligence investigation into your own company is most helpful if you're considering a merger or major sale. Before negotiations begin, it's important to understand the worth of your business.

A legal due diligence investigation can also help the buyer better understand the company. This includes all of the agreements that make it up.

Value a Target Company

In the same way that a legal due diligence investigation can help your company value itself, a legal due diligence can help you understand the value of another company.

Legal due diligence seeks to understand a value through information on the company's agreements, assets, and potential problems.

Drafting and Negotiations

A large part of a merger or acquisition is negotiating and drafting the agreement.  The good and bad information gathered during the legal due diligence will lend support to the negotiations. This is true whether a merger or acquisition.

The information discovered in a legal due diligence is especially helpful in assessing risk.

Drafting of the agreement is in-depth and complicated. This should be created by an experienced lawyer.

Identify Potential Closing Problems

A legal due diligence may also find potential problems that could delay closing the deal. There are many steps that must be taken before closing. A legal due diligence gathers the information to make that list.

Legal Opinion

A legal due diligence is typically completed by an attorney who specializes in due diligence investigations. The lawyer or lawyers will prepare a legal opinion based upon all of the gathered factual information. Often, a legal due diligence investigation is completed by the selling company and the buying company. This insures an unbiased opinion.

Goals of Legal due diligence

The goal of legal due diligence investigation is to assess the potential benefits and risks of selling or buying another business or business assets. There are two main areas of focus in a due diligence investigation.

Current status

Consequences of potential agreement

At the beginning of a legal due diligence investigation, lawyers are seeking to understand the current status of the business. This includes investigating relevant laws, governing documents, and contracts.

Determining status can also help to value a company and find ways to potentially improve that value.

Consequences

Along with the good, lawyers must establish a company's negative qualities during a legal due diligence investigation. This includes seeking potential problems with the transfer of assets or potential litigation.

When is Legal Due Diligence Necessary?

Legal due diligence is most common in two situations:

Sale of the proprietary rights to goods or services

Sale or purchase of a business in a merger, acquisition, or partnership

The sale of proprietary rights to goods has become more common in the digital age. With the sale of intangible goods and trademarked intellectual property, an investigation into right to use and ownership is very important.

Legal due diligence investigations are must more comprehensive for a merger or acquisition. There's simply more information to sift through and investigate. Mergers often include intellectual property and digital information now as well.

Legal Due Diligence Process

A legal due diligence investigation takes place in three stages.

Preparation

Investigation

The most time-consuming part of the process is the investigation or the gathering of facts.

This stage of the legal due diligence is to set goals and priorities. Often there is one central goal or multiple smaller important goals that stand out from the rest. Legal due diligence investigation are often limited by time and budget pressures. It's important to prioritize what information is most important.

During the investigation a lawyer or team of lawyers collect facts and documents. The findings will allow them  to formulate a legal opinion as to whether the sale or purchase is worthwhile. There are many parts to the investigation.

Establish the Big Picture. This comes back to the goal of the investigation. It's important to formulate the investigation around the central question or goal. This is also a good time to help the investigating lawyer understand the broad overview of your company.

Provide Documents and Interviews. The list of documents and interviews necessary for a legal due diligence investigation will likely surprise you with its length. The list of documents requested will likely be more documents than are actually necessary. The lawyer's job is to create a full picture, which means being thorough in gathering information. Consider making one of your c-level officers available to answer questions. Interviews are an efficient way to gather information.

The results of a legal due diligence investigation are revieled at the end of the investigation. In the results, the lawyer will present the data in as concise way as possible. The lawyer will also present a results summary which will point out the most important discoveries.

The results may also provide analysis or opinion. The lawyer may offer an opinion as to the validity of the sale or purchase.

The results may be provided in written format or verbal conversation. This depends upon the size of the investigation and the preference of the lawyer and the client.

Presentation of Legal Due Diligence Investigation Findings

The findings of a legal due diligence investigation are really only important to a buyer and the buyer's counsel.

The buyer will typically want the due diligence finding to be presented in a compact and user-friendly way. The presentation can take many forms:

Verbal conversation: This is a great method for small deals or a buyer who is concerned about cost.

Memorandum: This memorandum can greatly range in length and depth. For larger deals, the written document will be longer.

Whichever form it takes, the presentation of the legal due diligence investigation findings should describe all of the reviewed documents, analysis of key issues discovered, and make recommendations as to a solution to presented issues.

If you are having a due diligence investigation performed, be clear with your expectations. Be specific on how you would like information and issues presented to you at the end of the legal due diligence investigation.

Documents Examined During a Legal Due Diligence Investigation

There are many types of documents that are examined during a legal due diligence investigation. The documents provide information about the company and it's current performance.

Organizational Documents

This section includes documents such as:

Certificate of incorporation

Company by-laws

Limited liability agreement

Stockholder agreement

Common problems to look for here include:

Ownership: By looking through these documents, the lawyer is looking to establish who owns the company's equity. This establishes the majority equity owners and any subsidiary owners. This will also attempt to show if there will be any issues when acquiring the company.

Consent: What actions of the sale will require consent? From whom?

Transfer: Are there any restrictions on transferring company equity? Do equity holders have rights?

Dividends: What is the dividend policy? How can it be changed?Unusual points: Are there any points of agreements that seem unusual? Is there anything strange that could effect the transfer of the company?

This part of the investigation looks at all of the contractual agreements that the company is a part of. This includes:

Customer contracts

Supply contracts

Operating contracts

Parties: What parties have entered into the contractual agreement?

Change of control: Do the contracts provide regulations for a change of control?

Assignment: Can the contract be assigned? What are the provisions for an assignment?

Termination: What is the contract's termination policy?

Economics: What are the contractual agreements on economics? Can they be changed?

Merger and Acquisition Agreements

This section looks for any provisions for a potential merger or acquisition.

Parties: Who is part of the agreement?

Purchase price: Are there any purchase price adjustments that affect the business?

Escrow: Are there any escrow accounts? What funds are in the accounts? How will the funds be used?

Survival of warranties, representations, and indemnification : Does the business anticipate further indemnification claims?

Unusual provisions: Look for non-compete obligations and agreements.

Finance Documents

This part of the investigation looks at all financial documents. This includes:

Loan agreements

Hedging agreements

Promissory notes

Common problems to look for here:

Parties: What parties are named on the contract?

Basic terms: Is there outstanding debt? Are there loans?

Contingent obligations: This includes guarantees.

Restrictive covenants: Look for restrictions that could affect future transactions and operations.

Change of control: Are there any provisions for change of control?

Liens: Are there any liens on the business?

Any current or potential legal issues should be examined here. This includes:

Pending claims: How many pending claims? What is the damage estimate?

Litigation history: What claims have been paid in the past? Any class action lawsuits?

Litigation trends: What types of litigation has the company been involved in? What are the average damage costs?

Legal Due Diligence Checklist

When completing a legal due diligence investigation, it's common for lawyers to use a due diligence checklist to create organization. The checklist should include a suggested list of documents to gather.

The legal due diligence checklist is also used to keep the investigation focused on the primary goals. The due diligence checklist can also improve the efficiency of the investigation.

Example of Legal Due Diligence Checklist

The following information is an example of what should be included on a due diligence checklist.

Legal Documents

A list of all company subsidiaries, direct or indirect

Company capital

Number of authorized share for each class or series of stock

The number of issued and outstanding shares of each class or series of stock

The record owners of each class or series of stock

Company bylaws or articles of organization

Meeting minutes from stockholder meetings, board of director's meetings, and any committee meetings for the past three years

Stockholder agreements relating to management, ownership, or control of the company

Documents pertaining to prior financings or equity issuances. This might include:

Stock purchase agreements

Stockholder agreements

Registration rights agreements

All correspondence between the company and the directors that relate to:

Stock records

Transfer ledgers

Other records

Any documents issued by the company such as options, purchase rights, and warrants. These documents must include:

Name of the holder

Number of options

Rights or warrants issued

Date granted

Option or purchase price

Position of the holder within the company

Address list of all land, buildings, and improvements leased or owned by the company.

All pertinent government permits, licenses, or authorizations. This should include all related correspondence.

And federal, state, or local regulatory agreements in which the company is a party.

Example of Legal Due Diligence

A legal due diligence investigation can take many forms and gather many different types of information. Each legal due diligence investigation will be unique.

Take the example of a property transaction. This type of legal due diligence will need to assess:

Environmental liabilities

Real estate records

Liens on the property

Itemized list of necessary repairs

Deferred maintenance items

Compliance issues

Building code requirements

ADA regulations

The nature of the legal due diligence investigation depends upon the transaction.

Intellectual Property Map

A legal due diligence investigation gives the owner an opportunity to create an intellectual property map also known as an IP map.

An IP map documents:

Each component of IP

The inventor or creator of each IP component

The current owner or licensee of the IP component

Identifies the chain of ownership from inventor to owner to licensee. This cross references multiple supporting documents that validates each link. These documents might include:

Employment contract

Collaboration agreement

Joint venture agreement

Assignment from a student

Assignment from a contractor

Consultancy agreement

Material transfer agreement

Consent from a joint owner

Many others

There are two main goals of an IP map:

Facilitates an IP owner in undertaking a legal due diligence investigation. It helps to identify any gaps or problems. It begins the process of fixing any gaps or problems.

• The IP map can be presented to anyone who is interested in the IP and who might want to perform their own legal due diligence. This document may be able to help speed up any purchases or sales that are being done.

Proof of Due Diligence

A due diligence affidavit is provided to prove efforts made.  Often this is the case of an attempt to serve papers. The affidavit will list each attempt to serve the papers. The affidavit might also list the efforts made to locate the person being served.

The affidavit is used to show a court that all legal obligations to notify the person have been met.

How Long Does Due Diligence Take?

Legal due diligence investigation take a proportional amount of time to information. The more information that needs to be investigated, the longer the investigation takes.

A legal due diligence investigation can take anywhere from a few days to several months. The size of the company also plays a role in the length of the investigation.

The time required for the legal due diligence is determined by the buyer. Once the buyer is satisfied that enough information has been gathered, the investigation is completed.

A mistake that is commonly made is not leaving enough time to complete a thorough due diligence investigation. The limit may be due to time or budget.

Common Mistakes

Not Enough Resources

It's common for legal due diligence investigations to be limited by time and budget. This limitation can result in a lack of thoroughness. If the investigation isn't thorough, important potential problems may not be identified.

Not Completed

Some companies choose not to complete a legal due diligence prior to a sale or purchase. This greatly increases the risk of potential problems in the transaction.

Some problems may not appear for extended periods of time. There is no legal recourse for solving those problems after the transaction is complete.

Whether intentional or unintentional, owners, managers, employees, or researchers may influence the results of the legal due diligence investigation. This influence may taint the outcome of the legal due diligence investigation.

If the investigation is being done by in-house lawyers, consider getting a second opinion from unbiased lawyers.

Check Legal Coverage

The potential legal risks are often the most important aspect to assess in a legal due diligence investigation. It is pertinent to not skip this aspect of the investigation.

Protection From Mistakes

It is becoming more common for businesses to seek extra protection when entering into a transaction such as a merger or acquisition.

This extra protection can come in the form of special insurance. This insurance is known as "representations and warranties liability insurance." This insurance basically protects a business from wrongful acts.

Wrongful acts might include:

Misstatements

Misleading information

If you're considering merging with or acquiring another business, a legal due diligence investigation is in your best interest. A legal due diligence investigation provides insight into the new business. It also gives you an information to make an informed decision.

A lawyer who is knowledgeable in legal due diligence can help you complete the investigation. Consider hiring one of UpCounsel's knowledgeable lawyers.

Frequently Asked Questions

• What is legal due diligence?

Legal due diligence is an investigation into whether a business transaction is worthwhile. This type of transaction might be a merger or acquisition.

• When do I need legal due diligence?

A legal due diligence investigation is necessary anytime there is the sale or purchase of another business. It might also be necessary when evaluating the purchase of proprietary goods or services from another company.

• What's the cost of legal due diligence?

A legal due diligence investigation ranges in cost. The cost of the legal due diligence investigation is proportionate to the amount of research necessary.

Get Legal Assistance

If you are looking for help with legal due diligence as well as general advice along the way, you can post on UpCounsel to receive free custom quotes from the top 5% of attorneys with experience in your area. Customers have typically saved up to 60% on legal fees in comparison to large law firms. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures and Airbnb.

Hire the top business lawyers and save up to 60% on legal fees

Content Approved by UpCounsel

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• Due Diligence Checklist
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Due Diligence

Everything you need to know about conducting legal due diligence.

Due diligence is an important review any time you want to do business or need to have enough information to make an informed decision before completing the transaction. Due diligence is particularly important in situations where a company is considering a takeover or merger, by which the purchasing company acquires the entirety of the target company.

Bloomberg Law has the tools and resources you need to conduct a thorough legal due diligence review.

Essential legal due diligence resources

Bloomberg Law Contract Solutions helps you solve the most pressing challenges in your contract workflow with solutions built specifically for in-house attorneys to store, manage, draft, negotiate, and analyze contracts more efficiently.

M&A Due Diligence Checklist

Kick-start your legal due diligence and ensure you collect the right documents with our sample letter and detailed documentation checklists.

M&A Due Diligence Issues Reporting Template

Access this free template of a “red flag” report, which allows counsel to summarize key issues or actions following due diligence review of the target company.

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Corporate Guidance for a Risk-Based Approach to Due Diligence

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In an uncertain economic climate, a robust due diligence process matters now more than ever.

Stakeholders want the confidence to know an acquisition has withstood rigorous scrutiny. Because there is an even greater expectation of a more focused and deeper investigation upfront, expertly honed due diligence provides the rationale and comfort to proceed with a transaction despite larger market unknowns.

As mergers and acquisition (M&A) activity accelerates and deals pick up, organizations across industries can thrive with a revitalized due diligence process that streamlines contract management workflows , identifies the right targets, and collects relevant information that provisions for all probable outcomes.

What is due diligence in corporate law?

At its core, due diligence is the process by which a company reviews information from another company for the purpose of an acquisition, sale, or investment. Ultimately, due diligence helps corporate counsel answer the buyer’s question: “Is there any reason why we should not move forward with this transaction?”

Due diligence is also plain business sense. Because it precedes deal closure, the exercise helps parties confirm facts and financials, review risks and assumptions, and prepare for post-deal integration if the deal goes through. In effect, due diligence is the homework a company must do to make informed decisions.

Importance of due diligence

Essentially, nearly all business actions trigger due diligence considerations, with some derived from legal and regulatory mandates. These due diligence requirements compel a company to scrutinize customers, third parties, and – above all else – itself to detect, avoid, or manage legal, compliance, or ethical infractions.

While due diligence is important in cases where a company is considering a takeover or merger, it is equally relevant to all parties in any given transaction. For buyers, a focused and effective review should help verify information, identify potential issues, confirm valuation, and ensure the deal meets the stated investment criteria. Meanwhile, sellers can assess the buyer’s means to effectively finance the deal, their representations, and their own ability to remedy any red flags that might otherwise weaken the prospect of a strong bid price.

Buyer-side advantages of due diligence

From the buyer’s side, due diligence provides many tactical advantages, such as the ability to:

• Better understand the seller’s business and confirm the target entity aligns with the seller’s representations.
• Evaluate the merit of an acquisition through the identification and assessment of the deal structure, contract terms, liabilities, and risks.
• Identify any problems that require resolution prior to close or through future contract terms.
• Identify measures necessary for post-deal integration.
• Determine representations and warranties, as well as closing conditions and indemnification provisions, to include in the final agreement.
• Identify any other contractual or legal impediments to a successful close (e.g., any required consents that must be obtained).

In the end, due diligence done properly should help buyers decide whether to proceed with the deal.

Sell-side advantages of due diligence

While due diligence is often discussed from the buyer’s perspective, it is equally important for sellers to engage in a preliminary review well before a deal is closed.

Pre-sale (or “sell-side,” as it is also known) due diligence is an internal review of one’s own frameworks and assets. Although pre-sale due diligence resembles the due diligence process conducted by a buyer in a traditional M&A transaction, differences exist. Unlike buy-side access constraints, the seller doesn’t need approvals to access its own records or to meet third-party deadlines as part of its own review.

Sell-side due diligence analysis typically focuses on areas like:

• Corporate affairs.
• Financial, tax, and accounting.
• Litigation and disputes, as well as any regulatory compliance matters.
• Change of control provisions that a sale can trigger.

The latter case can help the seller identify the third-party contracts they have, with insights into contract assignment and consent. A seller might assess its own third parties for their views on a probable sale. While third parties may not be able to stop the transaction, they could still terminate their own contract with the seller in protest. But even if a third party didn’t want to stop the transaction, the underlying contract agreements might. Knowing this information in advance allows the seller’s legal team to strategize how best to work around these issues, obtain consent, and maximize buy-in.

Sell-side review fortifies the seller’s position in the M&A sales process in other critical ways. A seller may identify issues like tax liabilities and liens, which, if left unresolved, would reduce the bid price, dissuade bids, or leave the seller at a negotiating weakness. Conversely, through analysis of assets, products and services, and earnings, sell-side due diligence may also highlight strengths that bolster the acquirer’s valuation.

Increasingly, cybersecurity will be a top-of-mind issue for buyers, who will want to know about the seller’s cyber controls beyond just representations and warranties in the closing agreement. Expect questions on the sufficiency of technical systems and equipment, not to mention the privacy and security of data. For example, buyers may want to know if cyber controls follow industry standards and are audited, any identified issues, and the remediation status.

What should be included in due diligence?

Amid wider business and legal implications, companies must think beyond a uniform check-the-box due diligence exercise. Effective due diligence requires a comprehensive, yet targeted approach – tailored to address specific variables and circumstances.

Typically, parties will conduct legal and financial due diligence in business, but operational areas like supply chain, logistics, and procurement practices may also warrant in-depth review due to far-reaching legal and strategic considerations.

Balance, however, is equally important. To perform due diligence effectively, companies must also wisely manage time and resources, with the right targets investigated.

Risk-based due diligence analysis

Because not every target requires the same scrutiny, companies should rank entities to assess the needed due diligence. A risk-based approach recognizes that the due diligence scope may be limited by time and resources. As a result, the greater the risk, the greater the resources a company should expend on a due diligence review.

Due diligence process

The due diligence process varies for each transaction type. However, there are similar critical steps, regardless of the transaction type, outlined below. The process should start only once the parties have agreed to a deal in principle. The buyer’s due diligence process focuses on a review of information and documents furnished by the seller, while the seller focuses on confirming valuation and avoiding surprises.

Submit a document request list

To kick off this process, due diligence begins with the issuance of a due diligence request list from the buyer to the seller. The due diligence request list should be prepared for the specific transaction and is carefully focused to meet the buyer’s objective due diligence needs. To maximize objectivity, the buyer should be clear about what information they truly need from the seller.

Depending on the buyer’s objective and needs, a customized request list might include:

• Company and legal details – beyond the basics such as formation documents and operating agreements, these might include details on any ownership interest that the company holds in a third party, annual reports and periodic filings for a defined period (e.g., three to five years), and litigation and regulatory compliance matters, past and present.
• Financial information – in addition to items such as tax documentation, financial statements, and monthly bank statements (for current and closed accounts), the solicited information might include disclosure of any accounting issues and debts.
• Registration and licenses – copies of permits and all registration and licensing information.
• Insurance and liabilities – beyond a summary of insurance arrangements, information might include any pending claims and details on the cancellation of any insurance policies.

Additional request list items might span:

• Intellectual property information in terms of who owns the work, patents, and any groups or individuals with control rights.
• Product, services, and customer information.
• Physical assets.
• Operations, such as information on supply chains.
• Technology, such as a review of processes to ensure compliance with data protection measures.
• Environmental, like whether facilities meet relevant environmental regulations, among other scenarios.
• Human resources information, such as employment agreements, list of employees, benefit plans.

Assemble and share documents

Following submission of the document request list, the seller and/or its counsel then assemble documents and make them available to the buyer. In parallel, sellers can remedy any issues through internal review of relevant documentation, such as corporate governance contracts, financial statements, management and employee contracts, and real estate and commercial contracts. Note that during the process, certain steps may be repeated if new information comes to light.

Draft an issues report

After reviewing the documents and information furnished by the seller, the buyer’s counsel will create a due diligence issues report to highlight legal matters identified during the due diligence process. This “red flag” report, as it is known, summarizes legal issues, next steps, and supplemental diligence requests.

Equally important, any recommendation to proceed with the transaction should be backed by clear documentation.

The seller side may also furnish its own report and detail the results of its due diligence review for potential acquirers. With consideration paid to issues such as current or potential litigation, regulatory disputes, and unsettled intellectual property claims, sellers can demonstrate proactive management of myriad internal and external issues.

Making the due diligence process more efficient

While due diligence is complex and time-consuming, buyers and sellers typically pay their own way in the process. Due to costs, it’s helpful to identify work efficiencies.

Bidders may choose a staggered approach, with more in-depth due diligence to occur in later bidding rounds when a deal is more likely to occur. Sellers should periodically conduct a due diligence review even if they are not actively seeking to sell their business. As a form of self-assessment, sellers may identify factors that could impact future deals regarding the value, delay the deal (with contracts requiring consent), and what can be done before a sale to fix them. Bidders and sellers may also first review the highest-risk areas most likely to impact the target’s value.

To further streamline the process, it’s often wise to convert documents produced for due diligence into electronic form and share them in a secured virtual data room (VDR). Due to the confidential nature of the information, the target should control data room access, and leverage analytics to glean insights into items most reviewed by bidders.

Looking ahead with Bloomberg Law

The M&A marketplace is complex, and no two transactions are the same. Transactional attorneys can be strategic partners to their organizations and tailor due diligence to address very specific transaction nuances.

The right due diligence is more than a formality; it’s a targeted and defined approach driven by analysis and strategy. This article underscores the importance of timing, record keeping, document review and access, collaboration, and tracking during the due diligence process – all integral to an optimized contract management workflow . Through this upfront investment, due diligence can maximize efficiencies, generate insights, and ensure outcomes all parties can feel good about.

For buyers, investors, and sellers alike, Bloomberg Law Contract Solutions offers the tools and resources to perform due diligence in an efficient manner, so all party needs are addressed. With Contract Solutions, easily access your business contracts from a centralized location, check for inconsistencies, review obligations, and make amendments in preparation for a merger or acquisition. Alternatively, transactional documents can be drafted, negotiated, approved, and then monitored post-deal from the secure centralized repository.

Request a demo to see how Bloomberg Law Contract Solutions can simplify and streamline your contract workflows with AI-powered drafting, editing, and negotiating tools.

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Legal due diligence report: acquisitions

Practical law uk standard document 5-107-5011  (approx. 48 pages).

• Asset Acquisitions
• Legal business M&A and reorganisations: practice management
• Share Acquisitions - Private
• Monitor, review and audit
• File and information management
• United Kingdom