Have you ever purchased a used car? Did you wonder whether the car is a lemon even though it passed the test drive?
Similarly, when purchasing someone else’s business, there is asymmetric information. You would be concerned about unknown factors regarding the condition of the business and liabilities you are inheriting.
Accordingly, the purchaser’s lawyer would protect your interest by obtaining the appropriate representations, warranties and covenants from the seller in the sale and purchase agreement. The purchaser’s lawyer would also conduct an independent due diligence review of the business.
A due diligence review is an investigation into the business legal and financial affairs of the business. The purpose of the due diligence review is to
ensure there is complete disclosure of the business’ affairs in the company’s records,
evaluate the transaction (fair price, associated risks), and
confirm the validity of the company, major contracts, legal compliance and other important matters.
Specifically, a due diligence review will examine the following facts:
value of assets,
business risks and liabilities (ie Are there any pending lawsuits, etc.?),
corporate status (ie Are the company's business dealings lawful?), and
impacts of change of control over to you (ie. Is change of control permissible? Will change of control impact existing contracts or operations of the business?)
Depending on the nature of the business, various aspects of the business will be investigated. Often the lawyer will work closely with the purchaser's accountant during the due diligence process.
The law firm Landmark Law Professional Corporation may assist with your ongoing business legal needs. Due to principal lawyer, Winnie J Luk's, close working relationship with her father, Dennis Luk, Chartered Accountant, her legal advice is often supplemented with basic finance tax information.
Disclaimer: This article does not contain legal advice and only provides general information. It is not intended to replace advice from a qualified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this article before making decisions. Use of this article does not establish a lawyer-client relationship.