The Importance of Due Diligence

AdobeStock_86494120-300x200The phrase “due diligence” is often used in the law and is a critical component when contemplating a business transaction. Due diligence means thoroughly investigating and analyzing the facts and key terms of the deal before engaging in a major business transaction, such as acquiring a company or investing in a start-up. These deals involve decisions that can have a significant financial impact, potentially involving millions or even billions of dollars. Therefore, it is essential to ensure that all parties involved are fully informed and aligned before finalizing any agreements.

The experienced Silicon Valley mergers and acquisitions lawyers at Structure Law Group can assist you in performing due diligence before entering into a transaction, either as a buyer or a seller. We know how to spot the various “red flags” that can doom a proposed deal and provide expert guidance on how to steer clear of or resolve such hazards.

The Key Elements of Due Diligence

Due diligence is not something that is spelled out in some legislative statute. Each transaction is unique, and what will constitute adequate and appropriate due diligence can vary based on a number of factors, including your own assessment of the potential risks. As general guidance, here are a few basic elements of performing due diligence in most business transactions:

  • How Is the Business Structured? If you are a potential acquirer or investor, the first thing you want to know is how the business entity is structured. This means looking at the incorporation or organization documents, identifying all of the current owners, and ensuring the business is in good standing with federal and state regulators.
  • What are the Assets? You will need to know exactly what assets you are acquiring or investing in. This means identifying and verifying all of the company’s assets, including intangible assets like intellectual property.
  • How Is the Business Performing? The books and financial health of the company should be assessed. Due diligence includes examining a company’s financial statements, general ledgers, trial balances, and other basic financial documentation. In particular, you want to look for any liabilities or potential issues that have not been properly documented or reported.
  • Are There Any Tax Problems? The last thing you want to do is acquire or invest in a business only to discover it is facing a massive bill from the IRS for unpaid taxes. It is critical to analyze a company’s tax returns and tax structure as part of due diligence.
  • What Is the Overall Legal Situation? Getting sued or becoming involved in a legal proceeding is something that many businesses have to deal with. It is important to evaluate any pending or potential legal issues involving a company. This includes not just looking at pending lawsuits, but also potential problems that can give rise to legal action.

Speak with a Silicon Valley Mergers and Acquisitions Lawyer Today

Due diligence is often time consuming and can often feel like an unnecessary delay, but it is crucial to identify, and if possible remedy, any potential problems with a business before proceeding with the transaction. If you need additional guidance and legal advice in this area, contact SLG today to schedule a consultation.