Due Diligence
Due diligence is essential when purchasing a company or its assets due to the general principle that buyers must beware. Without express warranties or contractual provisions, no implied protections apply. Warranties and indemnities from the seller offer some assurance, but due diligence helps the buyer comprehensively understand the target company’s culture, operations, and potential risks. It also informs pricing adjustments, additional contractual protections, or decisions to withdraw from the deal.
The scope of due diligence depends on the buyer’s existing knowledge, the nature of the transaction, and practical constraints such as time and resources. In-depth investigation minimises reliance on warranties, which are harder to enforce post-completion and often subject to time and liability caps. By identifying risks early, due diligence allows tailored negotiation of terms and indemnities.
Due diligence typically involves a team of legal, financial, tax, and other specialists who evaluate aspects critical to the company’s value, such as property title, environmental compliance, intellectual property, and key contracts. Electronic data rooms streamline the process, particularly in competitive sales.
The findings influence the share purchase agreement, with warranties and indemnities designed to allocate risks equitably. Buyers often insist on warranties tied to the due diligence process to ensure accountability and provide legal remedies, ensuring transparency and protection in the transaction.
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