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Understanding Due Diligence in Business

On Behalf of | Sep 19, 2022 | Business And Corporate Law

Buying and selling goods, services, and even businesses are how companies get ahead these days. And in this digital economy, it gets easier and easier to find out virtually anything about anyone. That said, there will always be a role for good, old-fashioned due diligence in business. Simply put, some transactions are too valuable and complex to hinge on low-quality information. Instead, these deals require more research than a simple internet search about the CEO or a confirmation that your peers like the product.

When you are in the process of acquiring a company, merging your business with an existing one, or even entering into a high-stakes, high-dollar vendor contract, you need to conduct due diligence. The amount of necessary research will depend on both your comfort level and your budget. An experienced business lawyer can help. The lawyers at Batson Nolan PLC represent businesses of all sizes in mergers, acquisitions, joint ventures, and other exciting transactions. We can help you prepare for and undertake due diligence for your next deal.

What Is Due Diligence in Business?

Due diligence is a process of business investigation. It helps to verify information about a business opportunity, especially the other party’s financial information. Typically, the due diligence process takes place before a deal closes. The goal of due diligence is to confirm that a buyer or investor in a business deal is actually getting what they are expected to pay for.

For instance, if you were investing in a restaurant, you would want to check that the restaurant’s representations about customers, supplies, and foot traffic were correct. You might even want to head over to the location and enjoy a meal—as part of your due diligence, of course! Once you were satisfied that the restaurant was as good and busy as it claimed, then you might be comfortable investing money into that business.

The process is much the same for any other kind of due diligence in business, even if it can be slightly less delicious. For small business owners, due diligence can typically last anywhere from two to four weeks, depending on the opportunity you are investing in. If you are ready to take the leap and invest, the Batson Nolan PLC team can help you navigate the requirement of due diligence for your next business deal.

Importance of Due Diligence

Due diligence in business is one of the most important parts of a transaction. If due diligence goes well, a deal can close successfully, and people will walk away from the negotiation table satisfied. However, if due diligence uncovers poorly-kept financials or previously unknown lawsuits against the company, then you might expect the deal to fall apart. Without due diligence in business, the various parties will not have enough information to make an informed decision about whether to close the deal.

Key Areas of Due Diligence

When conducting due diligence in business, there are some key areas that you should look at when undertaking a transaction. An experienced business lawyer can help guide you through some of these items and how to collect them. Key areas of due diligence that most savvy small business owners should obtain when doing a deal include:

  • Information about and background of key executives;
  • Company financial statements;
  • Business formation records from the Secretary of State;
  • Key contracts;
  • Customer information;
  • Sales forecasts and information;
  • Marketing materials;
  • Operations processes and procedures;
  • Employee manuals and policies;
  • Employment agreements, especially those entered into with executives;
  • Information about the location and value of intellectual property; and
  • Company tax information.

This is not an exhaustive list. Your transactions may require specialized due diligence or may require the exchange of only a few key documents. A knowledgeable business attorney can help you tailor the due diligence process to your specific transaction. Contact the Batson Nolan PLC team today to discuss how we can help.

How to Conduct Due Diligence

Carrying out due diligence can be time-consuming and costly, depending on the nature of the transaction. However, for certain types of deals, the requirement of due diligence is not something that can be ignored. Thorough due diligence can identify weaknesses in a transaction before they harm you or your company. Before investing your time and money in any venture, you should know as much about your counterparty as possible.

There is no one-size-fits-all way to conduct due diligence. Some businesses have a set checklist of documents that they want to obtain for every transaction they enter. From there, they tailor any other due diligence requests to the specific transaction. Other entrepreneurs sit down with their attorney and look at every transaction with fresh eyes.

While there is no single best way to conduct due diligence in business, some best practices include:

  • Make information requests that are clear and specific to the transaction;
  • Understand the financial costs of obtaining and processing the information you are requesting; and
  • Confirm your confidentiality obligations before requesting and accepting highly technical information or trade secrets.

Speaking with an experienced business lawyer can help make the process of conducting due diligence go smoothly. Additionally, working with an attorney from our Batson Nolan PLC team can help you leverage legal technology to conduct due diligence efficiently. This can help you manage documents quickly and avoid being inundated by a warehouse full of files and papers and not knowing where to start.

The Batson Nolan PLC Difference

The Business and Corporate Law Group at Batson Nolan PLC has years of experience representing businesses of all sizes—from sole proprietorships to corporations—in a wide range of commercial law matters. We make it our goal to develop ongoing relationships with our clients and assist with legal matters through all phases of business ownership. Before you form a new business, enter contract negotiations or sign an agreement of any kind, contact our business attorneys to arrange a confidential consultation to discuss your commercial law matters. We can help you be successful in the due diligence phase and beyond.