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Due diligence checklists are standardized lists of questions and document requests designed to completely vet the viability of an opportunity before a transaction is completed. These checklists will require a party to produce situation-appropriate information that differs depending on the industry. In all instances, however, this type of checklist will be used as an investigative tool to establish a contracting party’s effort to uncover all information relevant to the decision-making process.
The requirement that a party prove that he exercised due diligence when completing a transaction has its roots in contract law. Courts will hold that a written contract represents the full intention of the parties, and any dispute will be resolved by construing the words on paper. If a party wants to claim fraud or improper dealing to invalidate the transaction, the court expects the party to prove he did all he could have reasonably done to identify the fraudulent nature of the opportunity and the attendant pitfalls.
As a result, due diligence checklists became a popular way to ensure and prove that every topic relevant to a transaction was thoroughly reviewed. If fraud or improper dealing occurred, it was then not the fault of the injured party that he couldn’t figure it out. He conducted his due diligence and did all that he reasonably could to establish the transaction’s legitimacy.
Checklists tend to be standardized by industry so that sellers can simply go down a list and provide the information indicated. Buyers can simply check the list to make sure everything expected in an ordinary transaction is produced. This way, the process does not have to be customized for every individual transaction.
Due diligence is an integral part of business mergers and acquisitions as well as commercial real estate transactions. When a business is being sold or merged with another business, it will have to provide a exhaustive amount of information to demonstrate the financial condition of the company and to document the status of existing relationships. Typical due diligence checklists will request information not only from the business but also from the principal owners and key employees.
In commercial real estate transactions, sellers typically have to disclose a wide range of information relating to environmental concerns, engineering specifications, regulatory compliance, and title status of the property, among other things. Due diligence checklists are used to ensure that whomever is sent to complete the transaction knows what information to collect for review. Likewise, it provides the seller with advance notice of the information that will be required to complete the transaction so he can prepare in advance.
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