In part 1 of this blog series, we discussed issues that can arise at the outset of due diligence. There are additional red flags that may come up as you work through the due diligence process. Here are some of the more important red flags in the commercial due diligence process that may arise as the due diligence process proceeds.
Failure to meet contingency deadlines/requests for extensions of time
Depending on the issue, a high level red flag warning will be raised by a request for an extension of time to meet a contingency deadline or an outright missed deadline. Obviously, a series of extension requests and/or missed deadlines should be deemed a “flashing” warning sign suggesting that the closing might be delayed or the transaction not consummated.
But even a single missed deadline can be cause for concern depending on the circumstances and the nature of the contingency. As suggested above, contingencies fall on a spectrum of difficulty. For example, verifying corporate authority to consummate the transaction should be relatively “easy” to accomplish through review of corporate records. On the other hand, obtaining a permit approval from the local municipal authority may be magnitudes more difficult. Failure to meet the contingency deadline for proof of corporate authority could be seen as much more severe because meeting that deadline is “easy” and well within the control of the party which needs to provide proof. Attention to this particular problem is warranted, intervention may be needed, and concern should be communicated to the principals to the transaction so, if possible, timely and appropriate action can be taken.
Failure to confirm information and/or inconsistent information
Due diligence is a long process of reviewing documents and confirming information. Another important red flag is raised if, during that review, information cannot be confirmed or if the review disclosed inconsistent or inaccurate information. This may occur, for example, when reviewing sales figures or inventory lists. Such inconsistencies and/or inaccuracies must be investigated and communicated to the principals to the transaction.
Failure to meet contingencies
For self-evident reasons, the most severe red flag is an acknowledgement that a contingency cannot be met. At minimum, a contingency that cannot be met will lead to renegotiations. But, often, a failed contingency will make the transaction nonviable.
For more information, contact Baer Reed. Baer Reed provides commercial due diligence process support and review and other legal support solutions to law firms and in-house legal teams around the globe. To learn more, contact us online or call us today at 888-433-1990.
- On June 30, 2022
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