Due Diligence in Company Acquisition – Part 1: Legal Due Diligence

Just as with buying a car, a test drive and an inspection of the vehicle papers are part of the process, so too is due diligence necessary when purchasing a company. This is what the thorough examination of a company for sale by the potential buyer is called. In our series of articles, we will explain to you which areas need to be checked when buying a company.

What is Due Diligence?

If a company is to be sold, first contact between the buyer and the seller is established during a contact phase. Afterwards, an initial documentation for assessing the company is created during the analysis phase, on the basis of which the buyer decides whether to make a non-binding offer to purchase (Letter of Intent). Subsequently, due diligence is required: the thorough examination of a company for sale by the potential buyer. It determines whether the sale negotiations continue and has a significant influence on details such as the price and any other terms of sale.

Depending on the type and size of the company, the scope of due diligence varies. However, it can generally be said that the larger a company is, the more areas must be examined, which is why the involvement of experts such as trustees, tax experts, or lawyers is highly recommended. The entire due diligence is divided into legal, financial, and business due diligence.

The Legal Due Diligence (Legal Due Diligence)

In this section, specific search for legal defects and risks in the company to be acquired is conducted. In addition to ongoing or impending legal disputes are also analyzed, as are concluded legal disputes that could have future consequences. Typically, the analyzed matters fall into areas such as corporate law, labor law, or antitrust law. As the benefits and risks of the company pass to the new owner upon purchase, they must be aware of any potential risks. As a subsection of the legal due diligence, tax due diligence is also a significant aspect, which helps to uncover tax risks or opportunities (such as for tax optimization). The involvement of an experienced lawyer and/or tax expert is highly recommended here due to the required expertise.

In the next article of our series "Due Diligence in Company Acquisition," we will explain to you what to look out for in financial due diligence.

Findea is happy to assist you with the implementation of a due diligence.