Some clients do not understand what due diligence is. When acquiring a business, the investor should conduct three types of due diligence before investing: business due diligence (usually conducted by the clients themselves), financial due diligence (conducted by accountants), and legal due diligence (conducted by lawyers). Legal due diligence includes basic due diligence and full due diligence. Basic due diligence is to conduct searches against the target company regarding bankruptcy, encumbrances, litigation, etc. Full due diligence is to review all the legal documents of the target company. Only full due diligence can confirm whether or not there are legal problems before closing. Such as, whether or not there are restrictions on the transaction; whether or not there are special terms in the agreements; whether or not seller has breached any agreement; whether or not seller’s documents have problems, etc. To conduct due diligence is to identify risks. Once lawyers and accountants conducted due diligence and issued their due diligence reports, they will be liable for the risks regarding due diligence. Some clients did not do due diligence searches to save cost, this is like closing your eyes when buying products. The buyer will take all the risks, including the target company’s problems. The buyer will know the problems of the target company only after closing.
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