What Does Legal Due Diligence Mean?
Legal due diligence is the process of collecting, understanding and assessing all the legal risks associated during a M&A process. During due diligence, the acquirer reviews all the documents pertaining to a target company and sometimes even interviews people associated with it. The idea behind this investigation is to understand if there will be any future legal problems due to this acquisition.
Divestopedia Explains Legal Due Diligence
Legal due diligence is an essential part of every M&A process for many reasons. Firstly, this process gives the acquirer a better opportunity to understand the target company and its operations before purchase. Moreover, it acts as an icebreaker between the legal counsel of both organizations so that they can work together to push the deal through.
Secondly, the buyer can use the information obtained through legal due diligence to determine the right amount to pay for the transaction. It also gives a chance for the buyer to closely analyze the financial, structural and operational aspects of the business so that subtle things such as lawsuits against the company, employee and labor arrangements, indemnification processes and intellectual property details, can be ascertained.
Thirdly, the information obtained during the legal due diligence process can help both the buyer and the target company to draft appropriate merger and acquisition documents and other ancillary documents as may be needed. It also plays a role in negotiating the right value for both parties, based on the legal obligations of the target company.
Fourthly, the legal due diligence process will help to identify the possible problems that can act as impediments to closing the deal. When both parties know the possible impediments, they can take steps to address the same to ensure the smooth completion of the agreement.
Lastly, both of the companies' legal counsel have to give a legal opinion at the time of completion of the deal. So, it is important that both legal teams are on the same page when it comes to certain legal aspects. For this reason, a good rapport is essential, and legal due diligence can help to provide that.