As a business, there are few decisions as momentous as the choice to invest in or merge with another company, to acquire that company as a full owner, or to sell your business. When you do, it can cause a fundamental upheaval in your own business as you struggle to accommodate the changes that are necessary to facilitate the merger or acquisition. When that happens, you need experienced lawyers who can guide you through the process to ensure everything goes smoothly.
At the heart of every successful transaction is thorough due diligence. This is the process by which the buyer investigates the target company to verify its value, identify risks, and inform the negotiation. For sellers, due diligence is equally important — it is the opportunity to identify and address issues before they become deal-breakers.
What Is Legal Due Diligence?
Legal due diligence is the comprehensive investigation of a target company's legal affairs — its contracts, litigation, intellectual property, employment matters, regulatory compliance, corporate governance, and real property. The goal is to identify legal risks that could affect the value of the transaction or create liability for the acquiring company after closing.
Due diligence is not a formality. In our experience, approximately 90% of the value in a transaction is determined not at the negotiation table but during the due diligence process. The issues identified — or missed — during due diligence directly shape the deal structure, purchase price, representations and warranties, indemnification provisions, and post-closing obligations.
The Due Diligence Process: Key Areas of Review
Corporate Governance and Structure
The foundation of due diligence is verifying that the target company is properly organized, validly existing, and in good standing. We review:
- Articles of incorporation and bylaws (or operating agreement for LLCs)
- Minute books and shareholder meeting records
- Capitalization table and stock ledger
- Stock purchase agreements, options, warrants, and convertible instruments
- Regulatory filings and licenses
- Good standing certificates from all states where the company operates
Red flags include missing or incomplete corporate records, unauthorized stock issuances, undisclosed option pools, and operating without required licenses. Each of these can create significant legal exposure for the buyer.
Material Contracts
Contracts are the lifeblood of any business. During due diligence, we review all material contracts, including:
- Customer and vendor agreements
- Lease agreements (real property and equipment)
- Loan agreements and debt instruments
- Joint venture and partnership agreements
- Licensing and distribution agreements
- Non-disclosure and non-compete agreements
We look for change-of-control provisions (which may terminate contracts upon acquisition), assignment restrictions, unusual liability provisions, and contracts that are not arm's length. A single adverse change-of-control provision can materially affect the value of a transaction by eliminating key customer relationships.
Litigation and Legal Proceedings
Pending or threatened litigation can have a material impact on the transaction. We review all current and threatened legal proceedings, including:
- Civil lawsuits and regulatory investigations
- Employment claims and EEOC charges
- Intellectual property disputes
- Environmental enforcement actions
- Insurance claims and coverage disputes
Even resolved litigation is relevant — it may indicate recurring issues or areas of vulnerability. We assess not just the direct financial exposure but the potential reputational and operational impacts.
Intellectual Property
For many companies, intellectual property is the most valuable asset. We review patents, trademarks, copyrights, trade secrets, and domain names, verifying:
- Ownership and chain of title
- Registration status and geographic coverage
- Licensing arrangements (inbound and outbound)
- Infringement claims or risks
- Employee IP assignment agreements
A critical issue we frequently encounter is the failure to obtain IP assignment agreements from employees and contractors. Without these agreements, the company may not actually own the IP created by its workers — a defect that can be extraordinarily difficult and expensive to remedy.
Employment and Benefits
Employment matters represent a significant area of potential liability. We review:
- Employment agreements with key personnel
- Employee benefit plans and ERISA compliance
- Workers' compensation and unemployment records
- Immigration documentation (I-9 compliance)
- Severance obligations and accrued leave liabilities
- Independent contractor classifications
Misclassification of employees as independent contractors is a common and costly issue. If the target company has been misclassifying workers, the buyer may inherit significant tax and employment liability.
Real Property
We review all real property holdings and leases, including title commitments, survey matters, environmental assessments, and lease terms. Key concerns include:
- Lease expiration dates and renewal options
- Purchase options and rights of first refusal
- Environmental contamination and remediation obligations
- Zoning and land use compliance
- Pending property tax assessments
Regulatory Compliance
Depending on the industry, regulatory compliance may be the most critical area of due diligence. We assess compliance with applicable federal, state, and local regulations, including industry-specific requirements, data privacy laws, environmental regulations, and anti-corruption laws.
Structuring the Transaction
The findings of due diligence directly inform the transaction structure. The two primary structures are:
Asset purchase: The buyer acquires specific assets and assumes specific liabilities. This structure allows the buyer to select which assets and liabilities to take on, leaving unwanted liabilities with the seller. However, it requires individual transfer of each asset, which can be complex and time-consuming.
Stock purchase: The buyer acquires the target company's stock, taking on all assets and liabilities — known and unknown. This structure is simpler but carries greater risk for the buyer, making thorough due diligence even more critical.
The choice between these structures — and the negotiation of representations, warranties, and indemnification provisions — is driven by the risks identified during due diligence.
Indemnification and Risk Allocation
Even the most thorough due diligence cannot eliminate all risk. Indemnification provisions are the primary mechanism for allocating risk between buyer and seller. Key terms include:
- Scope: Which types of losses are covered (e.g., breaches of representations, pre-closing liabilities, specific known issues)
- Survival period: How long after closing the seller remains responsible for indemnification (typically 12-36 months, longer for tax and fundamental matters)
- Deductibles and baskets: The threshold below which the buyer cannot make claims
- Caps: The maximum amount the seller can be required to pay
- Escrow or holdback: A portion of the purchase price held back to satisfy indemnification claims
The Poulson Law Approach
The business lawyers at Poulson Law have considerable experience representing companies in a variety of mergers and acquisitions, including restructurings, stock transactions, asset sales and purchases, mergers, joint ventures, investments, and buy-outs. We have represented majority and minority investors, entrepreneurs and start-ups, middle-market companies, and Fortune 500 corporations in a diverse field of industries, including financial services, healthcare, technology, media and entertainment, and hospitality, among others.
Our approach to due diligence is both thorough and practical. We identify risks, but we also help you find solutions. Not every issue is a deal-breaker — many can be addressed through deal structure, indemnification, or post-closing remediation. Our goal is to help you maximize the benefits you get from your transaction while minimizing the legal risks that might arise.
Frequently Asked Questions
How long does due diligence take? The timeline varies depending on the complexity of the transaction and the target company. For a straightforward transaction, due diligence may take 2-4 weeks. For complex transactions involving multiple subsidiaries, international operations, or heavily regulated industries, it can take several months.
What happens if due diligence reveals problems? Not all problems are deal-breakers. Many issues can be addressed through price adjustments, indemnification provisions, escrow arrangements, or post-closing covenants. We help you assess the severity of each issue and negotiate appropriate protections.
As a seller, do we need our own due diligence? Yes. Sellers benefit from conducting their own pre-transaction review — sometimes called "vendor due diligence" — to identify and address issues before a buyer finds them. This allows you to control the narrative and avoid surprises that could derail the deal or reduce the price.
Protect Your Transaction
Whether you are buying or selling a business, the sooner you engage experienced legal counsel, the better positioned you will be. Our attorneys will work with you to ensure your transaction goes as smoothly as possible. We will help you to incorporate newly acquired employees and assets, sort out structural redundancies, and ensure that all of the company's assets are accounted for. Call our Cooperstown office at 607-547-1195 to discuss your transaction.
