1. What Does Due Diligence Reveal before a Business Sale?
Due diligence tests whether the business matches assumptions behind the proposed price and structure. Buyers may review ownership, contracts, liabilities, licenses, employees, IP, and disputes.
Review Records That Could Change Deal Value
Legal due diligence should follow the deal rather than a generic checklist. Focus on records that affect value, control, or transferability.
- Corporate: Confirm ownership, governing documents, and approvals.
- Contracts: Check assignment, change-of-control, and consent terms.
- Operations: Review licenses, leases, employees, and disputes.
- Assets: Examine title, liens, IP, and transferred rights.
Connect Each Finding to a Deal Response
A problem does not automatically end the sale. Ask what it changes: value, transferability, closing readiness, or post-closing exposure.
| Finding | Possible Response |
|---|---|
| Missing consent | Seek consent or use a closing condition. |
| Known liability | Consider indemnity, holdback, or revised economics. |
| Ownership issue | Cure the defect or define what can transfer. |
| Contract exception | Disclose it and negotiate its treatment. |
2. What Happens When Due Diligence Finds a Serious Issue?
A significant finding may change deal economics, but diligence alone does not create an automatic price cut or termination right. The deal papers control too.
Revisit Economics without Assuming Repricing
A buyer may seek different terms when new information changes value. The seller can test whether repricing or a narrower contract response fits the risk.
- Price: Revisit value when the finding changes deal economics.
- Escrow: Reserve proceeds against a defined exposure.
- Indemnity: Allocate a known risk separately.
- Condition: Require an issue to be addressed before closing.
Read the Loi before Choosing the Next Step
A letter of intent may contain binding and nonbinding provisions. Its wording should control diligence rights, exclusivity, expenses, and any definitive-agreement condition.
| Loi Issue | Review Question |
|---|---|
| Diligence | What review rights remain open? |
| Exclusivity | Can the seller speak with another buyer? |
| Expenses | How are transaction costs allocated? |
| Binding effect | Which terms are expressly binding? |
3. How Can the Purchase Agreement Allocate Diligence Risk?
The definitive agreement turns findings into contractual rights and duties. Asset and equity deals require different liability analysis.
Match Representations to the Diligence Record
A stock purchase agreement may use representations, schedules, covenants, indemnification, and claim procedures to allocate risk found in diligence.
- Representations: State negotiated facts supporting the deal.
- Schedules: Disclose agreed exceptions.
- Limits: Set baskets or caps when negotiated.
- Survival: Define how long specified claims remain available.
Do Not Assume an Asset Sale Ends Liability Questions
An asset purchase agreement can identify assumed and excluded liabilities. An asset buyer generally does not take the seller's liabilities merely by buying assets, but recognized exceptions include express or implied assumption, de facto merger, mere continuation, and a transaction entered into fraudulently to escape obligations.
BCL § 909 also matters when a corporation disposes of all or substantially all assets outside its usual or regular course. When it applies, the statute requires board authorization and submission of the transaction to shareholders for approval under its voting rules.
4. How Do Earnouts and Seller Involvement Affect the Sale?
A seller may stay involved through an earnout, consulting role, transition work, or restrictive covenant. These terms can shift value into the post-closing period.
Define Earnout Mechanics before Closing
An earnout should explain how payment will be measured and checked after control changes.
- Metric: Define the agreed measure.
- Period: State when performance is measured.
- Access: Identify information used for the calculation.
- Disputes: Set a process for calculation disputes.
Separate Sale Proceeds from Continuing Work
Consulting duties and compensation should show what the seller must do after closing. A mergers and acquisitions review can align those duties with the purchase agreement and post-closing covenants.
- Services: Define continuing responsibilities.
- Payment: Separate service pay from sale consideration.
- Duration: State when duties begin and end.
5. What Protects the Parties If the Deal Does Not Close?
A deal may fail because of diligence, financing, consent, or another closing condition. The agreement should define termination rights and remedies.
Match Exit Rights to the Transaction
Reverse termination fees, liquidated damages, and specific performance are not automatic. Their availability depends on the agreement, facts, and applicable law.
- Conditions: Identify what must occur before closing.
- Termination: Define exit rights and notice requirements.
- Remedies: State the result of a qualifying failure.
Protect Proceeds That Remain at Risk
Escrow or holdback may reserve part of the price for defined claims. Release rules and claim procedures should align with indemnification.
- Amount: Define the reserved proceeds.
- Release: State when funds may be distributed.
- Claims: Define how covered claims are made.
6. Frequently Asked Questions
How long does due diligence take when selling a business?
There is no fixed period. Timing depends on the business, records, buyer requests, financing, required consents, and issues found during review.
Who pays attorney and accounting fees in a business sale?
The transaction documents and professional engagement terms control. Each side should check its expense provisions rather than assume a market practice applies.
Can a buyer cancel a business sale after due diligence?
Possibly. The answer depends on signed documents, remaining conditions, termination terms, and the finding itself. A problem does not create an automatic right to terminate.
Can due diligence continue after the purchase agreement is signed?
It can, depending on the agreement and closing structure. Check continuing information rights, covenants, and closing conditions.
7. Turn Due Diligence Findings into Clear Deal Terms
A diligence finding matters when it can be tied to price, disclosure, risk allocation, or closing. A business sale attorney near me can help separate a manageable issue from one that changes the economics or feasibility of the sale.
SJKP's attorneys can review diligence findings, transaction documents, and post-closing protections together. Contact SJKP to address unresolved issues before closing.
21 Aug, 2026
