This is Part Five in a series discussing steps in a business transaction. In this part, I’ll discuss the due diligence review. In short, a due diligence review is your chance to make sure that you are receiving in the transaction that for which you have bargained.
The scope of the review depends upon the transaction. If you are spending a few million dollars to purchase or invest in a company, you will do a more thorough due diligence review than if you are entering a licensing agreement that can be terminated with thirty days notice.
A due diligence review frequently begins prior to making an offer. If there is confidential information to be shared, a more substantive due diligence review may need to wait until there is a term sheet, definitive agreement, or other document with confidentiality provisions.
Legal issues you might address during a due diligence review
include verifying that:
- the assets to be transferred are not encumbered by any debts or other undisclosed liabilities
- the parties are validly organized in their respective states of organization and are authorized to go through with the transaction
- there is no pending or threatened lawsuit against the other party
- any intellectual property being transferred is actually owned by the party making the transfer
- any necessary third party or governmental approvals required for the transaction have been obtained
Of course, a thorough due diligence review is not limited to legal questions. The parties will also want to investigate records pertaining to marketing, financial, and company employees.