Legal Due Diligence: What You Need to Know

legal due diligenceDue diligence means that a person or company takes every step and precaution necessary to satisfy any related legal requirements. Due diligence can help to prevent liability issues, and potentially legal issues, from occurring. Much of due diligence is related to contracts and contract law and taking a class, such as Law of Contracts in 60 Minutes: A Fast Track Course from Udemy, can help to clear up the basics of contract law. This can help ensure that all precautions are taken to ensure that a contract is rock solid and does not have loopholes that could result in either party facing liability.

Understanding the Primary Reasons for Due Diligence

Legal due diligence is something everyone is required to do when they are doing business. The following are the primary reasons for due diligence associated with legal issues:

  • Understand your business better

Buyers need due diligence to get the information required to learn about the company they are buying from and to develop the buying process to purchase a company. This also helps to ensure that the lawyers retained by the buyer are able to learn about the business to ensure effective communication between them and the lawyers associated with the business being sold. 

  • Aiding in the development of all associated relevant documentation

Due diligence allows those involved in the transaction to learn the proper information so that they can negotiate and draft the acquisition or merger agreement and any other ancillary agreements that are related. A course in word processing as it relates to legal issues is also helpful in this process because it is important to understand how to draft documents correctly. Udemy offers a course called Lazy Lawyer’s 1 Hour Guide: Word to help with this.

  • Getting the target company’s value

The legal due diligence process provides information to the buyer about how much to pay for a company. They have to look at balance sheets and cash flow information, as well as other more subtle indicators, to look for potential liabilities and value. Important contracts and organizational documents also have to be looked at during the due diligence process. 

  • Find all related impediments to closing

All parties involved have to try and identify everything that has to occur before closing the transaction. They work to identify whether or not consents are necessary to close to deal. They look to see if there are contractual prohibitions associated with the transaction. If stock is being sold, something you can learn more about in Udemy’s Stock Market for Beginners Course, whether there are prohibitions will depend on the business. Also keep in mind that additional paperwork is needed for real estate lease sales. If the sale is a merger, whether it is a reverse merger or a forward merger must be stated, because this means more paperwork. 

  • Giving legal opinions at closing

Lawyers on each side of the transaction have to give a legal opinion on the matter when the acquisition or merger is closing. They have to look at the factual information that the target company provides to form legal opinions and legal conclusions. Due diligence helps to ensure the information is provided. Legal assistants may help with this step of the process by gathering all relevant information.

How to Accomplish Due Diligence

There are a few things that have to be done to ensure due diligence is being carried out, including:

  • Get the big picture: This step involves understanding the broader level of a company. 
  • Have all related interviews and document ready: The person or entity selling the business has to have all related documents prepared and ready for the buyer to pick up and go over.
  • Have the required level of due diligence: If the transaction is uncomplicated and small, it may only take a matter of days to satisfy due diligence. However, if the transaction is complex and large, it can take months to satisfy due diligence.
  • Be ready to present all associated due diligence findings: This is important for the buyer and it has to be done it a user-friendly and prompt format.

Due diligence applies in numerous different situations in the world of business, including share trading (which you can learn more about on the Udemy blog), so be sure that you understand the ins and outs of this process thoroughly in order to prevent any potential issues or complications. When a company is being sold, new owners often want to look at safety records before closing the deal. If an issue were to occur, it is important to be prepared. Udemy offers a course titled How Blind is Justice that talks about what can happen when corporations are not prepared and what to do if liability becomes an issue.