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In a sales contract, the buyer is responsible for conducting thorough due diligence before making a purchase. This includes inspecting the product for defects and seeking warranties from the seller to inform their decision.
Similarly, in mergers and acquisitions (“M & A”), both parties involved in a merger or the acquiring company in an acquisition must conduct research to assess the target company’s assets, liabilities, and other relevant factors before proceeding with the deal.
Due diligence is the process of evaluating and analyzing various aspects, such as legal and financial considerations, specific to the target business and its competitive environment.
No, due diligence is crucial for both asset and share purchases. It helps identify inherent risks and verifies key assumptions that influence the sale price, such as recurring revenues and material contracts.
For example, if the target has failed to remit tax deductions or sales taxes, the buyer could face severe consequences, as the government may have a deemed trust over the target’s assets.
Key aspects to verify include:
Searches may need to be conducted with relevant government entities, depending on the nature of the target business.
Essential documents include:
The results of legal due diligence can influence whether a transaction proceeds, its structure, purchase price, and the terms of agreements. The final deliverable is a due diligence report, which can vary in length and detail based on the review’s scope.
Acquirers should make specific requests to avoid unnecessary delays, while vendors should maintain accurate and accessible records to facilitate the process. Effective legal due diligence is crucial for negotiating and structuring a successful transaction, minimizing disruption, and aligning business objectives for both parties.
Hiring lawyers to conduct due diligence offers key advantages. They provide proper guidance throughout the M&A process and ensure compliance with regulations. This legal expertise helps companies feel confident that both the due diligence and the transaction will meet provincial and federal legal standards.
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