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Legal due diligence - a complete legal audit

A legal audit, also known as legal due diligence, is a fundamental process in the business world that provides an in-depth analysis of the legal status of a company or specific assets. This blog post aims to provide an overview of the key aspects of legal due diligence, its importance, application and the steps that are necessary to conduct it. This knowledge is indispensable for entrepreneurs, investors and company managers who wish to minimize the risks associated with business transactions.
Filip Samczuk
Author of the article
Published
October 2 2024
Reading time
6 minutes
Table of contents

Due diligence is a key process of legal analysis of a company or its assets that identifies and eliminates legal risks. It is commonly used prior to transactions such as sales, mergers or acquisitions to ensure legal compliance and uncover potential problems. In this article, you'll learn exactly what legal due diligence is, when and why it should be conducted, and the steps involved.

Legal due diligence lawyer

What is legal due diligence - key information

Legal due diligence, also known as a legal audit, is a comprehensive examination of the legal status of a company or its assets. The process is carried out by experienced lawyers who analyze the company's records and operations to identify legal risks and ensure compliance with applicable regulations. The importance of legal due diligence is invaluable, as it facilitates informed business decisions, minimizes legal and financial risks, and assists in negotiations.

A comprehensive legal audit tailors the scope of the audit to the individual needs of the client, covering various aspects of the business, such as labor law, commercial contracts, intellectual property or tax authority decisions, among others. This provides a complete picture of the company's legal status and appropriate corrective action if any problems are identified.

  • Legal due diligence is a comprehensive examination of a company's legal status to identify legal risks and ensure regulatory compliance.

  • A legal audit is crucial prior to the sale of a company or assets and in the process of mergers and acquisitions, which increases the value of a company in the market.

  • The legal due diligence process involves gathering documents, analyzing information, and preparing a report with recommendations to minimize legal risks.

When is legal due diligence conducted?

Legal due diligence is used in many business situations. First of all, it is necessary during mergers and acquisitions (M&A) transactions, the sale of companies or their assets, and when attracting investors. It is also advisable to conduct a legal audit at the time of a company's reorganization, listing on a stock exchange or taking up positions on the management or supervisory boards. The purpose of this is to make sure that all legal aspects are in order and there are no hidden risks that could affect the value of the transaction or the company's operations.

The implementation of legal due diligence has a direct impact on the value of an enterprise and the decision regarding its possible acquisition.

Steps in the legal due diligence process

The legal due diligence process typically goes through three key stages: gathering the required documents, analyzing the information gathered, and preparing the due diligence report. Each of these stages is necessary to obtain a complete picture of the company's legal status and identify any legal risks.

  1. Collection of documents that are necessary for the legal audit.
  2. Analysis of the collected information for compliance with the law.
  3. Preparation of a due diligence report that includes identified risks and recommendations for corrective actions.
checlist due diligence

Collection of required documents

While gathering the required documents, the audit provides information on key documents, ownership structure and business agreements. The list of required documents includes contracts, documents related to intellectual property rights, and financial records, among others.

In this phase, it takes into account the specifics of the industry, so that relevant data can be collected and verified in public records. Substantive analysis of documents should also be carried out to ensure that they are in line with reality (facts).

Analysis of the collected information

Analysis of the information gathered is a key stage of the legal due diligence process, which requires systematic work. The goal of this stage is to identify key areas of risk, such as legal non-compliance, that may affect the future operation of the company.

The analysis also includes an assessment of regulatory compliance and identification of potential legal issues. This makes it possible to prepare a reliable report that will help investors make informed decisions.

Preparation of due diligence report

The preparation of a due diligence report is the final step in the legal audit process. The due diligence report contains detailed information on the identified risks and recommendations for the investor.

The final report should be presented to all stakeholders to ensure transparency and a common understanding of the company's legal situation. This makes it possible to take appropriate corrective action and minimize legal risks.

Benefits of conducting a legal audit

Conduct legal due diligence carries many benefits. First of all, it reduces the risk of paying administrative penalties or criminal fines.

With an effective audit, it is also often possible to avoid administrative or criminal proceedings, such as those related to concessions, licenses or permits.

In addition, the audit makes it possible to eliminate prohibited contractual clauses that could expose the company to financial liability.

Legal due diligence also allows for the registration of trademarks and patents, which strengthens the company's position in the market and increases its visibility.

Finally, auditing sometimes also helps secure copyrights and trade secrets.

Conducting legal due diligence has many benefits, including identifying legal problems that could lead to disputes or financial penalties. A thorough legal audit reduces investment risk by giving investors a better picture of a company's situation.

This audit safeguards the interests of the buyer, revealing issues that may require renegotiation of the contract. In addition, legal due diligence includes a wide range of analysis, allowing a full understanding of the company's operations and regulatory compliance.

What is vendor due diligence?

Vendor due diligence is a special type of legal audit conducted on behalf of a vendor. The purpose of this audit is to identify and eliminate legal risks before starting negotiations with potential investors. This gives the seller a full awareness of the legal issues involved in the subject of the transaction and the opportunity to remove them, which can increase the value of the transaction and attract investors. Vendor due diligence is an increasingly common practice, especially in large M&A transactions.

How to choose the right law firm to conduct legal due diligence?

Selecting the right law firm to conduct legal due diligence is crucial to the effectiveness of the audit.

The law firm should have experience in conducting this type of analysis and knowledge of the specifics of the industry in which the audited entity operates.

It is important that the law firm has experience in legal audits and knowledge of the client's specific industry.

It is also good for a law firm to have references from previous clients, which can provide valuable information about the quality of its services. The legal team should have the ability to adapt to the client's needs and the ability to analyze legal risks.

It is also important for a law firm to have the right soft skills to smoothly conduct the audit process and effectively communicate with various stakeholders. Legal due diligence is an indispensable process for safe and successful business transactions.

How long does legal due diligence take

The time it takes to perform legal due diligence depends on the scope of the activities being evaluated and the size of the company, which can result in a duration of several weeks to several months. The more complex the scope of the study, the longer the entire process takes, which is often necessary to obtain reliable information.

The longer duration allows for a more thorough analysis and identification of all potential legal risks. It is worth noting that the due diligence process often involves multiple specialists from different fields, which also affects the duration of the audit.

How much legal due diligence costs

The cost of legal due diligence depends on several factors, such as the size of the company and the scope of the analysis, and can range from several thousand to even hundreds of thousands of zlotys for complex transactions or larger companies. Simpler analyses, focused on a single area, tend to be less expensive than comprehensive assessments covering all legal issues, or additionally tax or financial due diligence.

Investing in due diligence can help companies avoid hidden problems that could lead to much higher losses in the future.

Summary

Conducting legal due diligence is a key step in the process of any business transaction (mergers, acquisitions) to identify and eliminate legal risks. With a comprehensive legal audit, it is possible to understand the legal status of a company, which is essential for making informed investment decisions. This audit provides detailed information about the legal status of the company, which allows you to secure the interests of the buyer and minimize the risks associated with the transaction.

In conclusion, legal due diligence is an indispensable part of any major business transaction. Conducting a thorough legal examination can significantly increase the value of a company and reduce investment risk. At the same time, if irregularities are detected, it can reduce the value of the company or even make a planned transaction impossible.

About the author

Filip Samczuk
For 12 years, he has provided substantive support to entrepreneurs in realizing their dreams of starting or growing a business. He advises on obtaining financing, business development and legal issues. Privately a fanatic of sports, travel and history of the 20th century.

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