Due diligence: the legal element

Due diligence is an investigation and analysis by the buyer of the viability of your business. A valuable risk management tool for buyers of businesses and companies, due diligence is advisable for anyone looking to buy a business. You can find our blog on the due diligence process here.

In this article, we take a closer look at the legal aspect of the due diligence process and what it involves.

Legal due diligence

The first and foremost aspect of legal due diligence is to confirm the legal status of the company. Because there is no sale if the seller actually doesn’t have the authority to in fact sell the business.

Once you find that out, you can then start a detailed investigation and assessment of pending or potential legal risks and issues that the company may be facing including unresolved concerns with customer and client agreements or employment contracts.

It is important for you as the buyer to understand the legal nature of the company you are acquiring or buying into. The last thing you want is to enter into a contract of sale and spend the rest of your time weeding through legal documents that don’t make sense and finding that the validity of your trading platforms have been brought into question.

Undertaking legal due diligence can take time and money but it is advisable to complete as uncovering any serious legal issues with the company you intend to purchase is better done before rather than after you’ve signed on the dotted line.

To carry out an effective legal due diligence, you will find the following documents to be quite useful:

• Incorporation documents including any by-laws


• Legal structure of the company including all subsidiaries


• Employment agreements


• Customer and supplier contracts


• Shareholder minutes


• Documents relating to the lease or ownership of land and office space


• Ownership documents of important assets


• Documents relating to any legal proceedings either on foot or pending

There are a range of matters that legal due diligence can uncover but there are some areas that should definitely be looked at. In undertaking legal due diligence, you should endeavour to at least meet the following objectives:

• An identification and assessment of the major legal risks


• Potential solutions to reduce the legal risks identified


• An understanding of the legal implications of all contracts on foot with customers and suppliers


• Identify any missing guarantees and warranties


• Understand the indemnities and liabilities

Managing the legal due diligence process

Legal due diligence can of course be a complex exercise and it is recommended that you hire an expert like a qualified lawyer well-versed in mergers and acquisitions. You can also use this person to manage all your communications during the due diligence process, and they can act as a single point of contact for all responses from the seller and other external parties.

Depending on the type of business you are looking to buy, it is best to find a legal expert that has specialist knowledge in the particular industry as well as familiarity in mergers and acquisitions. A legal advisor with that background will be able to provide advice with an understanding of the unique matters of the transaction as well as your strategic and commercial objectives. Each legal due diligence will also require an understanding of the legal architecture of the particular business model of the company you are looking to purchase.

What to look for in a legal due diligence

As the term suggests, during a legal due diligence, you want to filter out all the legal risks or at least be aware of them so that steps can be taken to either reduce or eliminate.

The change of ownership of the company means that the new owner will become liable for all legal risks to do with the company. By going through the appropriate documents with a specialist legal advisor, you will be able to confirm or reduce your legal concerns with the business. Specifically, you will be able to check whether any change of ownership would result in any contract with external parties being deemed invalid or not operational.

You may also need to consider whether the licenses and permits that are critical to the running of the business would be affected by the change of ownership. Consent may also be required from the relevant regulator or concerned provider.

A business sale contract will have a range of contractual protections in the form of representations and warranties, which you can rely on to an extent. However, by undertaking due diligence on the legal aspects of the business, you will be able to sort out any issues upfront instead of suing the previous owner or engaging in fully-fledged litigations due to a defective or invalid warranty or representation.

Also by undertaking legal due diligence, you can look at the additional warranties or representations that may need to be incorporated into the contract. Some findings from the due diligence may even make you walk away from the deal so it is imperative to understand all legal considerations in your company of interest.

Other aspects that are found during the due diligence may not be problematic enough to walk away but they may impact the value of the business to you as the buyer and can be used as a negotiation tool. This is an example of a case where knowledge really means power.

Using the findings in a legal due diligence to negotiate

Findings from a legal due diligence that don’t make you want to walk away may in fact provide a basis for some strong negotiations about the purchase price.

Of course the seller is going to provide you with a very promising deal, and tell you all the positive sides of the business. But once the due diligence is undertaken, you may find the situation is not as rosy as initially professed.

There may be a range of matters that require resolution prior to completion of the deal. Armed with your findings, you can request that certain issues be rectified prior to completion of the deal or if you are willing to sort out those issues yourself, negotiate down the purchase price. It is up to you as to how you wish to play it but don’t let the opportunity pass.


At the end of the day, a comprehensive due diligence is recommended on any business purchase you wish to make. The legal aspect of due diligence is highly crucial as it goes to the validity of the sale, particularly, whether the seller does in fact have the legal authority to sell the business.

Looking for more tips on buying a business? Take a look at our other articles:
The top 10 questions to ask a seller before buying a business
Legal essentials when buying a business
M&A insurance: Are you covered?
Most costly buyer mistakes

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