What is meant by due diligence?

What is meant by due diligence?

Due diligence is a comprehensive investigation of a business or asset in order to evaluate and verify its market value and commercial potential. Varying levels of due diligence are useful in any transaction to ensure the buyer gets what they pay for, however the process is of utmost importance in more significant dealings such mergers and acquisitions or investment agreements. Conducting due diligence can help identify and scrutinise any risks and enhance the quality of the information available to the decision-makers during negotiations. 

What does due diligence assess?

The scope of due diligence can vary and can include analysis of the market, auditing of financial documents, scrutinizing future projections, evaluating employees, contractors and client base or reviewing a company’s intellectual property or physical capital. 

In the case of legal due diligence, the process investigates all legal documents and information to mitigate any legal risks in the purchase such as any pending or potential litigation, property or tax liabilities, any laws that would affect the sale such a environmental legislation and examining any representations, warranties and indemnities during the formation of the contract. 

Importance of due diligence?

Conducting a due diligence report can be beneficial to both the buyer or seller in enhancing the quality of information available. For the buyer it allows them the change to reduce exposure to risk and make them feel more comfortable about their expectations of the transaction. For a seller it can reveal the fair market value of their business, allowing them to negotiate the best price for the sale as well as initiate trust and ensure satisfaction for the buyer. 

To sum up

It is important to select legal counsel who have experience in legal due diligence. For every transaction this requires a degree of understanding of the legal architecture common to each type of business. 
If you have any further questions about due diligence or need assistance in any commercial transaction, get in touch with our commercial lawyers. You can call us on 1300 337 997, or fill in the contact form on this page.

About Ryan Leaney

Ryan works with OpenLegal as paralegal. His main legal interests are Corporate, Property and Employment Law.