Legal due diligence is a key stage in any M&A process, used to analyze the legal side of the deal and the company. Here's a quick look at what it involves and how it's carried out.
Legal due diligence
In any M&A deal, and particularly when buying and selling businesses, it's necessary to carry out a legal investigation of the business's situation in order to identify potential legal obstacles that could affect the sale and hidden risks in the transaction and in the company being transferred and, ultimately, to confirm that everything is in order before the deal closes.
This type of investigation is called legal due diligence, and it's a key stage both for the success of the M&A process and for avoiding future problems for both parties, especially the seller.
What is legal due diligence, and what is it for?
Legal due diligence is defined as the investigation and information process carried out by the parties to analyze in depth the legal status of the target company and determine whether there are risks in buying it.
The goal of this process is to minimize the risk of the deal through a review of the company's legal situation, analyzing all the legal risks that could prevent the sale from going ahead or lead to future disputes between the parties or harm to one of them, usually the investor or buyer.
Legal due diligence focuses on the legally relevant information about a business in order to assess investment opportunities when buying a company. It analyzes and identifies potential risks that prospective investors wouldn't see at first, through a thorough review of the relevant legal documents, such as the articles of association, transfers of shares, amendments to the articles, contracts of all kinds...
Once there is interest in investing in or acquiring a company, it's essential to understand the company's reality in depth and detect any aspects, dangers, or contingencies that aren't known at first and that may have an impact on whether the deal makes sense, its terms, and what the parties will get after closing.
The objectives of legal due diligence are:
- Helping investors arrive at a better valuation of the company they want to acquire, by detecting all the hidden risks (legal, employment, tax, and financial) that may exist.
- Ensuring the success of the deal, since it gives the parties all the legal information they need to make sound decisions and avoid unpleasant surprises after closing. It also helps identify any aspects that could jeopardize or complicate the agreement, making it possible to react in time to request more information, change the terms or, in general, modify whatever is necessary for the transaction to be completed successfully.
How is legal due diligence carried out?
The process is divided into different stages in which all of the company's activity is reviewed in order to prepare the report. These stages are:
- Non-disclosure agreement (NDA): many companies and investors sign a non-disclosure agreement (NDA) because the information to be shared must remain confidential and cannot reach third parties, particularly competitors. This binding agreement provides assurance that the exchange of information and documentation will be private and will not harm either party.
- Information gathering: this involves obtaining the data needed for the analysis by requesting information from the company and/or public registries (the Registro Mercantil, or Commercial Registry; the Registro de la Propiedad, or Land Registry…). If the required documentation or information on a given matter is not available, the reason must be explained. This information must be up to date and accurate.
- Document analysis: once all the necessary documentation has been obtained, it is reviewed and analyzed by qualified professionals.
- Report preparation: once the information has been analyzed and any potential contingencies, problems, or risks have been detected, a final executive document is prepared, highlighting the relevant findings and attaching all the information analyzed.
The legal due diligence report process is complex, often drags on, and can be a cumbersome procedure for many business owners. However, with technological innovation, it can be much more dynamic and efficient and help the deal succeed. The document containing the analysis of a company's risks can be key to decision-making when acquiring a company.
At Deale, we simplify and speed up the entire M&A process, reduce costs and, ultimately, increase efficiency to multiply the value we offer investors, business owners, and advisors compared with traditional models.
