Raising cash for your startup or looking to go through the washing machine that is an acquisition? You might be asking yourself how to prepare for a legal due diligence call. Legal due diligence calls are an important step in most business transactions, providing a thorough examination of a company’s legal contracts with a fine toothed comb. Whether you’re acquiring a new business, raising a round of investment, or entering into a partnership, proper preparation for a legal due diligence call is essential. Let’s have a look at the steps you can take to ensure you’re well-prepared for the grilling you’re about to endure (I mean enjoy because you’ve kept your legal contracts well organized right?).
Understand Why Legal Due Diligence Matters
Before starting to write your check list for preparation, you should probably understand the purpose of a legal due diligence call. Essentially, it’s an opportunity for the acquiring party or investor to assess the legal risks and liabilities associated with the target company. This includes reviewing contracts, corporate governance documents, intellectual property rights, regulatory compliance, litigation history, and more.
Income growth and a well polished unit economics will get you a long way in valuing your business but ultimately there’s a lot more to it. A business with great numbers doesn’t look so good if those numbers have been achieved with a whole lot of risk. These calls are set up to unearth this because it’s generally hidden deep deep down in a bunch of contracts.
Gather Relevant Documents
The best way to prepare for a successful legal due diligence call is to get familiar with all of those contracts you’ve been tucking away for years. Having time to amass a thorough document collection as well as finding a way to extract contract data out of these is important. Start by compiling all relevant legal documents, including:
- Corporate documents: Articles of incorporation, bylaws, shareholder agreements, and board meeting minutes.
- Contracts: Customer agreements, vendor contracts, employment contracts, leases, and any other agreements relevant to the business.
- Intellectual property: Patents, trademarks, copyrights, and licenses.
- Regulatory compliance: Documentation showing compliance with industry regulations and licenses.
- Litigation history: Records of past or pending litigation, disputes, or regulatory investigations.
Organize and Review Documents
Once you’ve gathered the necessary documents, it’s time to organize them systematically for easy reference during the call. Create a comprehensive index or folder structure that categorizes documents by type and relevance. Review each document carefully to ensure accuracy and completeness, flagging any potential red flags or areas of concern that may require further investigation. One of the best ways to do this is to use AI contract data extraction to quickly pull data out of long form contracts.
Redline What Matters
Raise Changes For Approval To Turnaround Contracts Faster
Anticipate Questions and Concerns
Put yourself in the shoes of the acquiring party or investor and anticipate the questions and concerns they may have during the legal due diligence call. Consider aspects such as:
- Contractual obligations: Are there any unfavorable terms or provisions in existing contracts?
- Intellectual property rights: Are there any issues with ownership or infringement of intellectual property rights?
- Regulatory compliance: Are there any compliance gaps or regulatory risks that need to be addressed?
- Litigation exposure: Are there any pending lawsuits or disputes that could impact the transaction?
By proactively addressing these questions and concerns, you can demonstrate transparency and readiness during the call.
Coordinate with Legal Counsel
Legal counsel plays a crucial role in guiding you through the legal due diligence process. Collaborate closely with your legal team to ensure they have access to all relevant documents and information. Seek their advice on how to address potential issues or mitigate risks identified during the due diligence process.
Prepare Key Stakeholders
In addition to legal counsel, it’s important to prepare key stakeholders within your organization for the legal due diligence call. This can include you finance team and senior leaders. Ensure they understand the purpose of the call, their role in the process, and any specific information or documentation they may need to provide. Clear communication and coordination among all parties involved are essential for a smooth and successful due diligence process.
Proper preparation is paramount when it comes to legal due diligence calls. By understanding the purpose of the call, gathering relevant documents, organizing and reviewing them thoroughly, anticipating questions and concerns, coordinating with legal counsel, and preparing key stakeholders, you can position yourself for success and navigate the due diligence process with confidence. Remember, thorough preparation lays the foundation for a successful transaction and paves the way for a mutually beneficial outcome for all parties involved.
