When preparing to sell a small or mid-size business, many owners focus on financial records and finding the right buyer. While those are critical components of any transaction, failure to address legal due diligence can threaten the integrity of the transaction. Legal due diligence is one of the most important steps a seller can take to ensure a clean, efficient, and defensible sale.
What is Legal Due Diligence
Legal due diligence is the process of compiling, reviewing, and organizing the legal records and key documents of a business in anticipation of a sale. Proactive legal preparation by the seller not only accelerates the buyer’s due diligence process but also strengthens the seller’s position by reducing uncertainty and highlighting the business’s readiness for sale. The purpose of legal due diligence is to prepare accurate disclosures required under federal and state securities laws, and to help:
- Confirm the legal existence and proper organization of the business
- Verify ownership of assets and equity interests
- Identify material liabilities, obligations, or disputes
- Ensure compliance with applicable laws, including securities regulations
- Prepare accurate and complete disclosures to potential buyers
Assembling an Advisory Team
Before generating a legal due diligence checklist, sellers should consider assembling a team of experienced advisors who can guide them through the process. An experienced advisory team helps manage expectations, reduce execution risk, guide negotiations, and maximize deal value. Common members include:
- Legal Counsel – To assess legal risks, prepare disclosure schedules, and draft or review deal documents
- Financial Advisor or Business Broker – To market the business, identify potential buyers, and assist in negotiations
- Accountants or Tax Professionals – To audit financial records, evaluate tax liabilities, and advise on deal structure
Start Early to Stay Organized
Legal due diligence can be time-consuming and document intensive. Identifying and addressing any known gaps, shortcomings, or unresolved issues in your business early in the process can significantly improve the outcome of a sale. Early execution serves as a safeguard allowing sellers to identify and resolve any unforeseen risks in advance. Buyers are more likely to proceed confidently, and at higher valuation when a seller is organized and transparent. Legal due diligence serves as a safeguard against unforeseen risks and liabilities to ensure there is no criticism for lack of analysis and preparation.
Below is a structured legal due diligence checklist identifying key categories buyers typically review and the documentation sellers should prepare:
| Category | Purpose of Review | What to Prepare |
| Corporate Structure & Governance | Review the company’s organizational documents to confirm legal existence, ownership, and authority to sell | Articles of incorporation, bylaws/operating agreement, board minutes, ownership ledger, certificate of formation |
| Capitalization & Equity | Verify ownership interests, outstanding securities, and compliance with securities laws | Cap table, stock/unit certificates, equity issuance history, Reg D filings if applicable |
| Financial Information | Assess the financial health and historical performance of the business | 3–5 years of financial statements, balance sheets, income statements, cash flow statements, tax returns, debt schedules, audit reports |
| Material Contracts | Review revenue sources, obligations, and change-of-control clauses | Customer/vendor agreements, real estate leases, loan documents, distribution/licensing deals, credit agreements |
| Intellectual Property | Confirm ownership and protection of core IP assets | Trademark and patent registrations, copyrights, IP assignments, licensing agreements, confidentiality agreements |
| Employment & Benefits | Ensure legal labor law compliance and assess workforce structure | Employee contracts, independent contractor agreements, non-disclosure agreements, benefits plans, payroll summaries |
| Litigation & Disputes | Identify existing or potential legal exposure | List of pending, threatened, or past claims, settlement agreements, insurance coverage and policies |
| Regulatory Compliance | Confirm licenses, permits, and regulatory standing | Business licenses and permits, industry-specific approvals, environmental compliance, data privacy and security documentation |
| Real & Personal Property | Validate ownership or rights to use business-critical assets | Deeds, leases, equipment lists, UCC filings |
| Securities Compliance | Ensure past equity issuances meet applicable legal requirements | Federal/state exemption filings, investor representations, subscription agreements |
| Disclosure Readiness | Support the preparation of accurate representations and warranties | Initial drafts of disclosure schedules, known issues and liabilities summary |
Why a Legal Due Diligence Checklist Matters
A comprehensive due diligence checklist can help small to mid-size business sellers identify and avoid potential risks and liabilities, demonstrate transparency to buyers, and enhance the credibility of the business. It also protects against post-closing disputes and positions the seller to:
- Anticipate buyer concerns and prepare responses
- Identify and fix compliance issues before they become deal-breakers
- Present the business in the best possible light during negotiations
The earlier sellers begin organizing legal documents and involving legal counsel, the more smoothly and profitably the sale is likely to proceed. Legal due diligence is not solely a buyer’s tool, it is an essential part of the seller’s preparation process. Due diligence is not just a step for disclosure but is also part of the broader negotiation process. While sellers must provide buyers with sufficient information to make an informed decision, the scope, timing, and manner of those disclosures should be carefully managed in consultation with legal and financial advisors. By proactively organizing documents, addressing potential liabilities, and working closely with qualified advisors, business owners can make the sale process more efficient and improve overall deal outcomes.
This is just an example of what a common due diligence checklist would look like and is for educational purposes only. The specifics of a transaction may require additional or different material to be reviewed.