Estate Planning Lawyer in Chesterfield
Call Today For a Consultation 586.690.4400

What is Due Diligence?

New clients often come to us during the early stages of either a business or real estate sales transaction. Many of these clients presume that we will simply document the transaction with a purchase or sales agreement or perhaps review an agreement they have already received from the selling party. During that initial interview or information gathering session, the new client is sometimes surprised to learn that the role of a buyer’s attorney should be much more than simply reviewing an agreement and rubber stamping the transaction.

In fact, a lawyer’s role in assisting with due diligence is just as, or perhaps more important, than simply negotiating the terms of the deal. The due diligence process is where the parties to a transaction work together to verify that the property or business being purchased is exactly as represented by the seller. In other words, the buyer is verifying that they are going to get what they believe they are buying.

The processes involved with due diligence depend upon the assets or business being purchased.

What follows is a list and explanation of some of the must have due diligence that should be undertaken in any transaction. By no means is this list intended to be comprehensive or complete. Rather, it is intended to be an explanation of the basic analysis that should be done for every deal and why that analysis should be done.

Business Purchase Due Diligence

When considering the purchase of a business as a going concern or purchasing assets owned by a business, the due diligence process is designed to verify the fact that the asset to be purchased is as represented and worth the amount that has been agreed to be paid. The types of due diligence conducted depends upon the types of assets that are being purchased.

For example, any purchase of a going concern will necessarily involve the inspection of the books and records of the business. A buyer will want to verify that the business owns the equipment that it is using. A buyer will want to verify that the business has the customers that are reflected in the records. These steps, among others, are necessary to prove that the business is worth what is being paid.

A failure to conduct due diligence can sometimes lead to a buyer purchasing a company that is simply not worth the agreed upon price. For example, if it is discovered that the company does not own its equipment but instead leases it, or if it has no long-term contracts or relationship with customers, that might have an impact on the purchase price that was agreed upon. It is better to come to these conclusions before the transaction closes than to wait until after money has changed hands. It is far easier to back out of a deal during the due diligence phase than to try to sue later for a breach of contract.

Real Estate Due Diligence

The purchase of real estate also presents some substantial facts and issues that must be verified or analyzed as part of a due diligence process. As with the process involved with the purchase of a business, the process involving real estate involves the verification of the asset that is being purchased and the value of the asset that has been agreed upon.

One of the first issues that should be considered when buying real estate is the condition of the property. The condition of the property can include both the physical structure and the land itself. In the case of the physical structure, any buildings should be carefully inspected to verify the condition. This should be accomplished with either a professional builder or engineer. Of particular concern regarding the structures is the physical condition of the buildings and any deferred maintenance that might be needed to bring them into an appropriate condition.

The second issue that should be considered with the property involves the land itself. The buyer should be aware of what was on the property before. Was there a gas station located on the property? Did someone use the property for an industrial use? Answers to these questions should guide the buyer towards the type of environmental testing that needs to be done on the property. In nearly all cases a buyer should engage the services of an environmental testing company to conduct a general analysis of the property to look for any environmental concerns that might be present.

Finally, an investigation should be done to determine if the property can be used for its intended purpose. That issue may require a visit with the local zoning enforcement division of the municipality to verify that the property is zoned appropriately for the types of business that the buyer intends to conduct on the property. It would certainly be unfortunate to buy a parcel with the intent of opening a manufacturing facility only to learn that such a use has been prohibited by the local government’s zoning laws.

These issues point to ensuring the buyer is getting exactly what the bargain with the seller called for. Without conducting some due diligence, the possibility of getting taken is always present. While there is always the possibility that there will be issues with a transaction, the appropriate use of due diligence will limit or eliminate some of those issues.

Request a Consultation Today

The attorneys at Penzien & McBride PLLC have extensive experience with business and real estate transactions. We are always ready to help any clients that might be in the process of either getting started with your transaction or if you are farther along and need assistance with finalizing your agreement. If you would like to schedule a consultation to discuss your situation, feel free to contact us today.

We are here to listen to your concerns and can provide you with the efficient counsel you need to protect your best interests.

To schedule your case consultation with one of our dedicated attorneys, please call (586) 690-4400 or contact us online.

Categories: