Legal Due Diligence
What is Legal Due Diligence ?
Legal Due Diligence is part of the process of undertaking research into a business or investment project to make sure that it is in fact, as it has been represented to you and that it does not have legal deficiencies that undermine its value.
Do an investments' or businesses' legal deficiencies really matter - if no-one noticed them before?
These days Legal Due Diligence investigations are common, to prevent loss by investors and buyers who would rather pay a small legal fee to investigate a project, and then pay less for the business (and then pay to fix the problem), or not buy a problem business at all if the problem is more than they want to deal with.
SImply put Legal deficiencies can mean:
- You cant resell the business
- You cant get new investors, or
- You can only sell at a substantial loss.
For example, if you dont have the legal right to the crown lease of your service station, or your cattle station, or you don't have the intellectual property rights of the software that your new company is selling, you may have a completely worthless venture or business.
"I have known that Business Broker for 17 years and they are 100% fair and honest"
A seller or business broker looking to sell you a business (a going concern), or to get you to be one of the investors in an investment project (a property development or a start up venture for example), may not deliberately misrepresent a venture or opportunity to you. However they may misrepresent the opportunity to you unknowlingly.
This misrepresentation of the facts can be for many reasons, but certainly it can occur (and we have cases of it occuring to clients) where even a longstanding owner and vendor themselves simply did not know that some of the legal right(s) the business was relying on, was lost a long time ago.
What kinds of businesses are worth a Legal Due Diligence ?
Projects or business that can be significantly adversely effected - by the legal rights or legal circumstances of the project or business being not secured properly, or by these rights or legal circumstances being different to what was understood by the investor or purchaser - are worth a undertaking a Legal Due Diligence on.
These would include any project or business that, for example:
- Uses a client list
- Uses know how or procedures
- Uses a set of important suppliers who have limited supply capacity
- Uses key employees to manage a project or process or risks successfully
- Uses a well know business name or brand
- Gets income from a network of referrers
- Relies on a specific set of communication channels
- Relies on rights to trade from the State Government
Besides making sure the financial due diligence is in place (the income, the expenses, the accounts payable performance, the overhead costs, the EBITDA and the ROI as relevant) we also need to understand if you have the legal rights that you are investing in or purchasing - that the project or business relies on.
Legal Due Dilignce is often recommeded, to prevent a buyer or investor losing substantial value in the new investment, in these types of ventures:
- Motel - lease or purchase
- Real Estate Agencies
- Medical Centres
- Insurance and Finance Brokers
- Management Rights Letting Agent
- Property Developers
We have undertaken legal due diligence activity for clients in all of these industries.
The legal due diligence is considered to have such a large effect on the value of some businesses that it is a requirement of bank lending to persons buying some types of businesses.
What kinds of Legal Rights typically need assuring ?
Some examples of the types of legal rights that are investigated and reported on by a Legal Due Diligence investigation are:
1. Legal Rights to:
- Exclusive business name registrations and account ownership(s)
- Web site domains
- Phone accounts
- Online accounts (facebook, Twitter etc.)
- Charge the income to clients (Client contracts of service are not deficient)
2. Documented Enforceable Restraints of Trade on individuals who are:
- Involved in the creation of significant intellectual property
- Undertaking the performance of duties for clients
3. Assets purchased / relied on being:
- Unencumbered (land without a mortgage encumbering it, or equipment that has no PPSR charges and no loans owing)
- As described and fit for purpose (not deficient such as a property which is not able to be developed for legal reasons)
- Crown leases
- Crown marine leases
4. Rights to assign Leases that are needed for the business to:
- Occupy the premises with certainty
- Have the rent not suddenly increased and the term of lease not changed without notice
Preliminary review of your Investment Opportunity and Fixed Fees
We are happy to review a deal that you are considering - a purchase or an investment in a project or a business - and advise if there are likely any legal rights that the business is likely relying on, and advise if we think a Legal Due Diligence is reasonably necessary.
You then can make an informed decision whether to undertake a legal due diligence or not.
We are happy to provide a fixed fee quote in writing - once we understand the scope of the work involved.