Red Flags in the Commercial Due Diligence Process Part 1
Whether a commercial transaction is related to real estate or to business acquisitions, sales, or mergers, once the transactional agreements and documents are executed, the due diligence process begins. Among other things, the due diligence process involves verifying all information, warranties and representations in the transactional agreements and satisfying any and all contingencies that must be met before the deal can be consummated. Generally, each major contingency will have a corresponding deadline that must be met and there will be a general deadline by which the commercial due diligence process must be completed.
As the due diligence process progresses, the attorneys working to complete the transaction may encounter a number of “red flags” that may: delay the anticipated closing date, call for intervention or renegotiation by the principals, or call into question the viability of the deal. Consequently, part of the due diligence process involves being aware of warning signs, having a careful watch for such signs, and taking appropriate action. Here are some important red flags you might encounter at the beginning of the commercial due diligence process:
Failure of to engage sufficient expertise and staffing
One early due diligence red flag is the appearance that one party or the other seems to have an overworked and understaffed team of lawyers. Due diligence is task-intensive and time-consumptive. Insufficient and/or inexperienced personnel will result in delays in providing documentation, initiating third-party approvals, ordering reports, reviewing information received, and in drafting documents necessary for the closing. These cumulative delays will endanger the satisfaction of contingencies and the various deadlines detailed in the transactional agreement. If this red flag is discerned, intervention may be warranted and it might be reasonable to suggest that some of the process be outsourced to an experienced and dedicated third-party due diligence team.
Failure to initiate early action to meet contingency deadlines
Another important due diligence red flag is the failure of one party or the other to initiate timely action necessary to meet various contingency deadlines. This is particularly important for complex and time-consuming contingencies. These must be initiated quickly. As an example, if lender financing is expected to be complex, actions must be taken to meet the relevant contingency deadlines immediately after the transactional agreement is executed. As another example, if UCC or other encumbrances must be released, then efforts to obtain those releases must begin long before the respective agreement-based contingency deadlines.
For more information on the commercial due diligence process, contact Baer Reed. To learn more about our services, contact us online or call us today at 888-433-1990.
- On June 15, 2022
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