The Importance of Due Diligence in Business Transactions
Due diligence certainly isn’t the most exciting part of a business transaction. In fact, it’s probably the most tedious and painstaking part. However, it is absolutely essential to treat this task with the utmost importance in order to protect your clients.
Reger Rizzo & Darnall attorneys recently attended a Continuing Legal Education presentation entitled, Due Diligence in Business Transactions. As a preliminary matter, we discussed the goals of due diligence. Essentially, the presenters asked the question, “why are we doing all of this?”
Their answer was:
- to confirm deal value;
- to verify the representations and warranties; and
- to determine if there are necessary consents or filings.
To confirm deal value, attorneys make sure that there are no hidden liabilities. We also review the intellectual property (IP) to make sure that any IP will remain protected throughout the transaction, and that the value of the IP will not be lost. It should be noted that a lawyer’s role in a business transaction isn’t to determine the value, but simply, to confirm items that have been cited as creating value.
In order to verify the representations and warranties and determine whether any consents or filings are necessary, attorneys must carefully review the corporate documents, contracts, permits and government approvals that apply to the parties. Based on the review of these and other similar documents, the attorneys will be able to determine whether the transaction can proceed as planned, or, whether further representations and warranties, or exceptions to the existing representations and warranties, are needed. The lawyers will also be able to determine whether further agreements, such as assignments or consents, will be necessary.
A lawyer’s role in the due diligence process is to preview any documents a client intends to disclose, review documents produced by other parties and make sure there is a process in place for due diligence so that nothing will fall through the cracks. In order to start the process off on the right foot, lawyers must create a due diligence checklist which lists all items to be produced by the respective parties.