Legal documents that are required for due diligence include documents that pertain to the company’s assets, business operations, and potential liabilities. The review is usually conducted prior to a merger or acquisition or other business transaction and is crucial in determining the value of the company. It also assists in understanding the risks involved in an acquisition by reviewing contracts, agreements and any restrictions or encumbrances that apply to assets.

In addition to examining the physical assets of the target business, lawyers frequently look at financial information like state and federal tax returns as well as bank statements and credit reports. They also will look into the company’s payroll, employment benefits, contracts and the structure of the organization. Legal due diligence is a procedure that can take 30 to 60 days. In more complex transactions the amount of time can increase significantly.

Attorneys will also examine the regulatory aspects, including any compliance concerns and antitrust analysis(opens in a new tab). They will also review the current legal environment of the company including any litigation that involves the target company or its officers.

Examining the risk of a transaction is the most important element of a legal diligence investigation. It is typical for lawyers to suggest obtaining representations and warranties and liability insurance(opens in new tab) to cover the purchase. This is essential, particularly when the buyer is not familiar with the history of the company that they are buying from. It is a way to protect the seller from misleading claims or assertions made by the buyer. Not to mention lawyers can scrutinize any documents pertaining to the company’s policies for employees like golden parachutes and severance packages(opens in an entirely new tab) which could be affected by changes in ownership.

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