Understanding Due Diligence

Due diligence is a word that we hear often. Whether it’s in buying a home, or purchasing a business, we often toss around the term as a necessary safety precaution before putting our names on the dotted line. But what does due diligence actually mean when purchasing land or a business, or any other major purchase?

What Due Diligence Is

Simply put, due diligence is the search to uncover any and all knowable facts and issues related to the purchase. During a due diligence period, documents are often made available from the seller to the purchaser for inspection. These documents can include financial records, receipts, correspondence, or bank account records.

Many of the documents to be reviewed when buying land or a business will require an expert pair of eyes. That’s why many purchasers may hire accountants, inspectors, lawyers or other specialists to review the documents provided to them by the seller.

In many cases, a seller producing documents may want a purchaser to agree to confidentiality. Generally, so long as there is nothing unusual about it, it is commonplace to sign confidentiality agreements with respect to documents provided during a due diligence period.

This is so that if the deal doesn’t happen, the (former) purchaser can’t use the information it looked into against the (former) seller. As you can imagine, competitors could easily pretend they were interested in a deal, just to access sensitive information, then cancel the deal and use the information gained against their competitor.

What Gets Disclosed?

It may be common sense to think that a seller has to disclose anything and everything negative to you about the business or property being purchased. But legally, they may not have that obligation. This is because the law imposes on you, the purchaser, the duty to uncover anything that you could have or should have known about, even if the seller doesn’t tell you.

For example, a seller of a bar may not disclose its liquor license is suspended. However, that information is readily available through public records and governmental agencies. You may not be able to fail to perform such an inquiry, and subsequently complain in court that the seller never disclosed it to you.

The same is true for information in the financial documents given to you. If the seller doesn’t mention the company has a large debt, but the information was present in financial documents and you didn’t see or appreciate it, a court may hold you responsible for the mistake.

But where a seller conceals or misrepresents latent defects or problems that you couldn’t reveal or discover through due diligence, the seller could be sued for fraud or misrepresentation. As you may imagine, in court, arguments over whether a misrepresentation or omission was latent, or discoverable, becomes a hotly debated issue.

If you’re making a large purchase or engaged in a complex business transaction, don’t put your assets at risk. Contact Tampa business attorney David Toback to discuss your needs and review documents to make sure your business or purchase goes as planned.