Glossary · Diligence
Legal due diligence
Definition
Legal due diligence is the lawyers' review of a target company. They check who owns the shares, what the key contracts say (especially change of control clauses), pending disputes, licences, employment terms and intellectual property. Findings go into a red flag report and shape the warranties and indemnities in the purchase agreement.
Where legal due diligence comes up
On this site, in our guides and in the conversations we've written up.
Related terms
Change of control clause A contract term that lets the other party end or renegotiate the contract if the company is sold. Red flag report A short diligence report that lists only the serious issues, instead of describing everything that was reviewed. Representations and warranties Statements of fact the seller makes about the business in the purchase agreement, with a remedy if they prove untrue. Due diligence The investigation a buyer, investor or lender runs on a company before committing: its finances, contracts, legal position and operations. Commercial due diligence A test of the target's market, customers, competitors and growth plan, to see whether the business case holds. Financial due diligence Diligence on the numbers: earnings, working capital, debt and cash flow behind the headline figures. Operational due diligence Diligence on how the business actually runs: processes, systems, supply chain, sites and people. Tax due diligence A review of the target's tax filings, structures and exposures, so hidden tax liabilities are priced in or covered.