Selling a business is a big dealโit usually comes after years of hard work and planning to grow it. However, before the deal is finalized, there is one critical step that should never be overlooked: the legal due diligence. Through auditing, it is able to identify current or potential issues of a legal sort, i.e., disputes, obligations, or compliance discrepancies which could prevent sale or reduce value of the firm. A proper legal review ensures transparency, provides assurance to the buyer, and is important for an easy sale. Skipping this step may result in future problems and impact your final payment significantly. A clean legal record is a good, secure exit.
In this blog, we will take you through what legal due diligence is, why it is needed, and how to carry out a legal due diligence successfully when selling a business.
What is Legal due diligence?
A legal due diligence is a careful examination of the legal status of your business. It entails evaluating all the agreements, compliance certificates, corporate governance, intellectual property rights, human resource policies, and other matters of law so that you validate all of them prior to sale.
Think of it as taking a preventive actionโyou’re identifying and fixing issues beforehand, instead of allowing others to find them out.
Why Legal Due Diligence Is Important Before Selling Your Business
Buyers will conduct their own due diligence when they make their purchase. When they uncover unresolved legal issues, it will delay the sale, reduce the purchase price, or kill the transaction.
A legal due diligence will help you:
- Reveal and correct legal vulnerabilities
- Show prospective buyers a tidily sorted and clean business
- Enhance the confidence of buyers
- Avoid legal surprises when selling
How to Complete Legal Due Diligence before Selling
Following is a step-by-step guide to assist you:
- Review Corporate Governance and Organization
Review all business formation records (articles of incorporation, bylaws, operating agreements) to ensure they are current and comply with area laws. Make sure that:
- Annual reports are current
- Shareholding and ownership records are current
- Board of directors’ minutes and resolutions are recorded
- Review Contracts and Agreements
List and review all significant contracts, such as:
- Vendor and customer contracts
- Business loan and lease agreements
- NDAs and non-competes
- Partner or joint venture contracts
Review contracts for any terms that might apply when the business is sold.
- Value Intellectual Property (IP)
Ensure that ownership and protection of all intellectual property are in place:
- Trademarks, copyrights, and patents
- Proprietary technology and software licenses
- Trade secrets or confidential business processes
Ensure that everything is registered and documented correctly.
- Evaluate Employment and HR Procedures
Assure employment law compliance and check:
- Employee contracts and offer letters
- Non-compete and confidentiality agreements
- Employee handbooks and policies
- Payroll, benefits, and tax documents
Resolve any ongoing labor issues or outstanding HR issues.
- Assess Regulatory Compliance
Assure the business is operating activities within the lawful parameters of its industry. This includes:
- Business licenses and permits
- Environmental laws
- Health and safety regulations
- Tax compliance and timely filing of returns
Your customers want to be assured that your business isn’t at risk for regulatory fines.
- Look for Litigation or Disputes
Before acquiring or investing in a business, it is crucial to look for any litigation or disputes. Investigate current or past legal conflicts, including lawsuits, regulatory actions, or arbitration proceedings. These can pose significant financial or reputational risks. Uncovering such issues early allows you to assess potential liabilities and their impact on the business. If there are any pending matters, try to resolve or clarify them during due diligence. Ensuring a clean legal standing not only protects your investment but also smoothens the ownership transition. Always consult legal professionals to interpret findings and guide your next steps appropriately.
Discover and check for any current or previous legal conflicts, court cases, or arbitration proceedings. Know possible liabilities and attempt to settle pending matters if possible.
- Consult a Legal Expert
A business sale legal review can be intricate. Having an experienced business attorney as an ally can streamline the process and ensure it is correct. They’ll understand what purchasers are searching for.
Selling a business is about more than just profitโit’s about legacy and transition. By conducting a thorough legal due diligence, youโre setting the stage for a successful, stress-free sale. Itโs a strategic move that protects your interests and gives buyers the confidence to move forward.
Conclusion
We at MatchValley provide safe, confidential, and comprehensive legal due diligence services meant to place your company in sales mode with absolute confidence. Weโre here to give you a strong launchpadโwith a growing network and support that actually helps. Itโs not just about having the right platform. Knowing the process, whatโs coming next, and being prepped can make a huge difference in how you make decisions.
