April 30th, 2025
Conducting Legal Due Diligence in M&A Transactions
Posted in: Business Law Tagged: Dustin M. Dorsino
Author: Dustin M. Dorsino
When you’re at a grocery store, do you open a carton of eggs to check if any of the shells are cracked? When you are interested in buying a company you should work with professionals that apply the same logic. It’s vital to check for unnecessary risk before acquiring a new business or entity by looking into its operations through legal due diligence. One of the main goals of a Stein Sperling M&A attorney is to ensure a client does not acquire a business with cracks in it (e.g., a $500,000 outstanding loan or multiple pending products liability lawsuits) without being adequately protected – which is where the legal due diligence process comes into play.
What is Legal Due Diligence?
In an M&A transaction, legal due diligence is the process by which the acquiring company collects and reviews various categories of information about the seller or target entity for the broad purpose of making an informed decision about whether to complete the transaction.
After signing a letter of intent and a non-disclosure agreement, you’ll need to work closely with an attorney to create a comprehensive information request. Your attorney will help you gather and analyze documents covering corporate structure, financials, assets, property, employees, licenses, contracts, customers, suppliers, insurance, and any legal matters.
They will thoroughly examine all documents, paying special attention to contracts that might contain transfer restrictions, obligations that could become your responsibility, or problematic termination conditions. Legal counsel can help you identify concerns that will need additional investigation or provisions before closing.
Using Due Diligence to Mitigate Risk
When buying another company, conducting due diligence is just the beginning. What’s truly important is how you use the information gathered to protect your interests. While reviewing the target company’s documents and information, you should simultaneously be working with your attorney to negotiate the definitive purchase agreement that will govern the acquisition.
The purchase agreement will contain representations and warranties—essentially promises from the seller about the condition of their business. Based on what is discovered during due diligence, your attorney can implement several protective actions, including, but not limited to:
- Restructure how the purchase price is paid, reducing upfront cash in favor of promissory notes or performance-based earnouts if significant risks are identified.
- Add specific conditions that must be met before closing, such as requiring the seller to resolve outstanding litigation or pay off certain debts.
- Hold back a portion of the purchase price for a defined period to cover potential claims that might arise after closing.
- Include provisions that reduce the purchase price if certain key contracts cannot be successfully transferred to your business.
- Create specific indemnification provisions addressing particular areas of concern revealed during your investigation.
These protective measures directly respond to risks uncovered during due diligence, substantially reducing your exposure when acquiring another business. Working with experienced legal counsel throughout this process ensures these protections are properly structured in your final agreement, maximizing protection while facilitating a successful transaction.
Reach Out to An Attorney Today
M&A transactions are oftentimes extremely complex and require in-depth investigation to ensure that you are adequately protected from potential financial and legal liabilities. If you have any questions about mergers and acquisitions, please contact a Stein Sperling Business Law attorney for assistance.
