At a basic level, legal due diligence involves risk analysis. For the investor, a range of risks may exist in relation to the business, such as:
-The accuracy of the past financial accounts of the business (if any) and its future projection.
-Whether the business key personnel, suppliers and customers will remain.
-Whether the business has good title to its assets.
-Whether those assets are worth the value the company attributes to them and whether those assets will produce or do what the owners of the business say they will do (e.g. is more money required to complete the product or invention?)
-Whether the business owns or has otherwise secured rights to any intellectual property which is key to the business or does it lie with individuals associated with the idea/business. With a view to a possible IPO or trade sale down the track, this issue is crucial to realizing the value of the business.
-Whether there are any existing liabilities that may manifest themselves in the future to disrupt the operation or financial performance of the business.
-Tax Risk – deductibility issues – When can depreciation be claimed? The timing of deductions affects cash flows?
-The particular country’s political risk. An overseas investor needs to be comfortable with the political risk.