Due diligence is an integral part of company mergers and acquisitions.
Due diligence checklists are standardized lists of questions and document requests designed to thoroughly examine the viability of an opportunity before a transaction is completed. These checklists will require one party to produce information appropriate to the situation, which will vary by industry. In all cases, however, this type of checklist will be used as a research tool to establish the contracting party’s effort to uncover all information relevant to the decision-making process.
The requirement that a party exercise due diligence in completing a transaction has its roots in contract law.
The requirement that a party demonstrate that it exercised due diligence in completing a transaction has its roots in contract law. The courts will consider a written contract to represent the full intent of the parties and any dispute will be resolved by interpretation of the words on paper. If a party wants to allege fraud or improper treatment to invalidate the transaction, the court expects the party to show that it did everything it could reasonably have done to identify the fraudulent nature of the opportunity and the cheating that occurred.
As a result, due diligence checklists have become a popular way to ensure and prove that all matters relevant to a transaction have been thoroughly reviewed. If fraud or improper treatment occurred, then it was not the fault of the aggrieved party who did not know about it. He conducted his due diligence and did everything reasonably possible to establish the legitimacy of the transaction.
Checklists tend to be industry standards, so sellers can simply make a list and provide the information listed. Buyers can simply check the listing to ensure that everything that was expected in a normal transaction has occurred. This way, there is no need to customize the process for each individual transaction.
Due diligence is an integral part of commercial mergers and acquisitions, as well as commercial real estate transactions. When a business is sold or merged with another business, a comprehensive amount of information will need to be provided to demonstrate the financial condition of the business and document the status of existing relationships. Typical due diligence checklists will request information not only from the company, but also from key owners and key employees.
In commercial real estate transactions, sellers typically need to disclose a wide range of information related to environmental issues, engineering specifications, regulatory compliance, and title status, among other things. Due diligence checklists are used to ensure that whoever is sent to complete the transaction knows what information to collect for review. It also provides the seller with advance notice of the information that will be required to complete the transaction so they can prepare ahead of time.