The Importance of Due Diligence

Jean Feng

Due diligence is essentially an investigation to target any risk from a legal perspective. This process occurs before acquiring a business or company. The purpose is to have knowledge of the risks prior to purchase. For example, when purchasing a real property, it is important to know who the legal owner is.  Sometimes the legal owner isn’t the beneficial owner.  As common practice in the real estate development, especially with commercial property, the legal owner is not the beneficiary owner, therefore, due diligence is highly recommended.

From a legal perspective, the more knowledge a buyer has about a business, the more informed they are. Learning as much as they can about the inside workings will be very advantageous. For example, if there are numerous employees, knowing about any outstanding human rights issues or complaints will be beneficial in understanding and creating solutions.

The result of legal due diligence will help explain the current situation of the business, identify the risks and structure the acquisition. For example, in a share transfer, the buyer inherits the entire company, including all liabilities. If there are substantial risks involved with a company, an asset purchase may be a better way for the purchaser. In this case, the buyer selects only the assets they want and leaves the rest.

What’s involved?

So you’re ready to purchase a commercial property, but have you looked into the company’s history? If you’re serious about purchasing, engaging a lawyer and/or an accountant to investigate the project is a wise move. Accountants are a very important part of due diligence. Lawyers are only looking at the legal perspective, but by working with accountants as well, you will also have someone looking at financial statements, identifying taxation issues, and letting you know if what you’re buying is even worth the price.

More often than not, once a lawyer starts to dig into a company’s history, there are always surprises that begin to surface.  The process of legal due diligence is here to inform you of the unexpected. You don’t want to be surprised after you acquire - if you see the risk coming, then you’ll be prepared to handle it.