Corporate Due Diligence Checklist: Keep Yourself Covered
30 Oct 2018
In the corporate world, success often comes down to doing your homework. The old saying “knowledge is power” definitely rings true, especially when it comes to mergers, acquisitions and investments.
To be sure that you’re making the right move, you’ll need to know as much as possible about the company that you’re getting involved with. Completing a “due diligence” process allows a potential buyer or investor to learn more about a company in order to finalise a transaction or investment.
To put it simply, due diligence arms you with the information you need to ensure that you’re not going into a major investment or acquisition blind - or just relying on trust and “good faith”. Done properly, it can save you from making bad decisions and help protect your long term viability.
What Is Due Diligence Exactly?
Due diligence is a thorough appraisal of a business that a potential investor or buyer will undertake before engaging in a business deal. If you’re the party doing the buying or investing, your lawyer will review the target company’s assets & liabilities, structure, operations and key business relationships.
By doing so, you’ll be able to effectively evaluate the deal’s strategic and commercial potential. It’ll also help ensure that the deal is priced correctly.
Your Due Diligence Checklist
Every deal is different, and the depth of the due diligence process needed will vary depending on the company involved and the dynamics of the deal. That being said, the following areas should be included on any thorough due diligence checklist.
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Corporate Structure & General Matters
The first step in the due diligence process should always be a careful review of the company’s corporate structure, capitalisation, organisational documents and general corporate records in order to make sure that everything is in order. This can include reviewing incorporation documents, company constitutions, organisational charts, a list of security holders, employee share plans and any options granted to acquire securities.
This area of due diligence explores any historical tax liabilities and is used to obtain an analysis of any tax carryforwards and their potential benefits. Your lawyer and accountant should use this process to verify that taxes are current in all jurisdictions and that there are no unexpected tax problems that you’ll have to deal with.
When it comes to a merger, acquisition or investment, future performance and strategic fit can be just as important as the current profitability of the target business.
A proper due diligence process will explore the ways in which the company will fit in strategically with your current business both now and into the future.
This includes factoring elements such as HR, integration & transition, technology, marginal costs and general work culture.
Engaging an intellectual property lawyer can be an essential part of due diligence as it can help you to establish the quality and extent of the target company's technology and intellectual property (along with its protection).
This will typically involve a review of: patents, copyrights, trademarks, domain names, trade secrets, and licences & licensing agreements.
The material assets of a company are always key to a transaction, especially in the case of mergers and acquisitions. Generally speaking, the appraisal will focus on: inventory stock, real estate, equipment, technology and research & development.
One of the most difficult and time consuming parts of due diligence, having a corporate lawyer review all material contracts and commitments of the target company, is absolutely crucial.
We won’t go into the full list of documents to be reviewed, but it’s vital that you engage an experienced and qualified legal team to thoroughly review all contracts currently in place.
Whether they’re a key resource in a deal or not, getting an understanding of the company’s management and employee base is very often vital to understanding the value of the company.
During this process an employment lawyer will generally review all employee contracts, benefits and policies.
In order to establish any potential legal liabilities, a lawyer generally reviews and threatened, pending or settled litigation, arbitration or regulatory proceedings involving the target company.
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Compliance & Regulatory Matters
A thorough due diligence process will also involve a review of regulatory and compliance issues - both involving the target company and the deal/investment in general.
As you can see, doing a thorough job of your due diligence requires a lot of work and specified legal expertise. Get it wrong or skip over any of the parts we’ve mentioned and you risk exposing you company to the negative consequences of a bad investment (such as wasted investment capital, fines or expensive litigation).
At Murfett Legal we have the experience and personnel required to make sure that your due diligence process arms you with all of the information you need to make the right decisions.
With our corporate & commercial law team on your side you can rest easy knowing that you’re working with a trusted partner that will leave no stone unturned in our investigations. Don’t risk getting blindsided by unknown factors.
Get in touch today to find out more about how we can help you perform outstanding corporate due diligence.
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