Understanding the Due Diligence Process in a Business Transaction

Transactions are fundamental to the business world. Practically everyone has wandered into a store or gone onto their favorite website or app and exchanged money for goods and services. Some transactions, however, require more research than simple confirmation that your peers like the same brand of coffee or loved the same book.

When you’re in the process of acquiring a company, merging your business with an existing one, or even entering into a high-stakes supplier agreement, the amount of necessary research you have to make is going to be much deeper. This process is known as due diligence.

What is Due Diligence?

Due diligence is the process of acquiring information (especially non-public details) in order to understand a company and/or its services before completing a transaction. The information requested will vary depending on the nature and scope of the deal. If you are spending millions to acquire a business, for example, you’re going to be more thorough than if you are entering into a supplier agreement that can be terminated with sufficient notice.

What all due diligence exercises have in common is the attempt to confirm that what you ultimately receive in a transaction is exactly or as close to what you expected.

Areas of Due Diligence

The due diligence process typically begins before an offer is made. Areas of investigation include (but may not be limited to):

 

  • Inventory: All products and materials in stock for either resale or client use. Inventory valuation may include assessing the condition of the items, how long they have been in stock, and their resale potential.
  • Legal Documents: These include contracts, purchase agreements, leases, distribution agreements, employee agreements, and other legal documentation concerning the business.
  • Financial Statements: Books and financial statements help determine a company’s earning power. Sales and operating ratios can be compared to industry ratios available from companies like Dun & Bradstreet or Robert Morris & Associates.
  • Tax Returns: A close review of business tax returns for the last five years can give a reasonably accurate idea of the actual net worth of the company.
  • Liabilities: These include lawsuits, creditor liens, or assets being used as collateral for short-term loans.

 

Carrying out due diligence can be tedious, time-consuming, and even expensive, but for certain transactions it is absolutely necessary. It can identify your exposure to third parties if the vendor has not been compliant with applicable regulations and legislation, and pinpoint those areas of the company that are vulnerable in terms of contractual arrangements with customers or suppliers. Before investing your time and money in any enterprise or partnership, you should know as much about the company or other person as you do about your existing business and partners.

If you are considering a major investment or business strategy in New York or Florida and require experienced assistance with the due diligence process, contact Rosen Law today. Our business law team will seek to undercover and investigate any matter that could impact or reduce the value of your investment. We know what questions to ask and how to quickly and effectively find the answers, so that your golden opportunities do not come with unexpected strings attached.

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Our attorneys, admitted to practice law in New York, Florida, New Jersey, Connecticut, Pennsylvania, and Georgia, practice within a wide range of legal areas including business and real estate litigation, Fair Labor Standards Act litigation, complex real estate transactions, preparation of condominium offering plans, business sale and purchase transactions, construction law and litigation, New York City tax abatements, estate planning, probate and probate litigation and much more.

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