Don’t Sign That Deal Yet: Your Legal Due Diligence Checklist for M&A Success
Would you buy a house without a proper appraisal? That’s what skipping legal due diligence in a merger or acquisition is like—except the stakes are higher, the paperwork is thicker, and the fallout can be far more expensive.
Whether you’re acquiring a competitor, merging with a strategic partner, or purchasing a fast-growing startup, legal due diligence is what protects your investment. It ensures you’re not inheriting hidden liabilities, contract disputes, or compliance violations that could sink the deal—or your company.
In this article, we’ll walk you through a detailed legal checklist for M&A due diligence, covering everything from corporate governance to IP rights and employment matters. You’ll also learn why this step matters, the role diligence plays, what red flags to look for, and how to approach due diligence efficiently. This guide is built for business owners, executives, and legal teams navigating the complex world of mergers and acquisitions, with practical tips drawn from real-deal experience.
Key Takeaways
Legal due diligence protects buyers from hidden liabilities, contract issues, and regulatory risks in mergers and acquisitions.
A thorough checklist should cover corporate structure, financials, contracts, employment matters, IP, and compliance.
Red flags—like missing financials, IP issues, or unresolved disputes—can signal major risks and impact deal terms.
An experienced legal team helps structure the review, interpret documents, and negotiate stronger M&A outcomes.
Starting due diligence early and using tools like virtual data rooms keeps the process organized and efficient.
What Is Legal Due Diligence in M&A?
M&A (mergers and acquisitions) involves combining two or more companies through purchases, hostile takeovers, mergers, tender offers, purchase of assets, and other methods. Legal due diligence involves a thorough investigation of a company’s financial, legal, and operational details. It covers all relevant details to identify potential risks and liabilities. Legal due diligence is time-consuming but is essential for risk management, deal structuring, and valuation confirmation.
Ideally, the due diligence process is completed after the preliminary processes and documents, but before transaction documents and regulatory filings. Due diligence enables the parties to ensure that an M&A transaction, which appears favorable on paper, will deliver the benefits and value the parties desire.
Why the Legal Due Diligence Process Matters
The legal due diligence process is crucial because a party may fail to disclose information that could significantly impact the transaction. Reviewing records and conducting a comprehensive investigation allows the acquiring company to:
Avoid hidden liabilities by uncovering the issues before the transaction, including disputes and lawsuits
Ensure regulatory compliance with relevant laws, including employment, environmental, and data privacy laws, to avoid regulatory violations
Assess the company’s legal structure and legal standing
Protect intellectual property (IP), including confidential information, copyrights, trademarks, and trade secrets
Validate contracts and obligations to avoid contractual breaches, including supply agreements, financing agreements, customer contracts, and supply agreements
Determine issues that could impact the purchase price and terms of purchase
Prepare for integration, support financing, and prepare for post-deal integration
Legal due diligence is the legal version of a medical examination. A medical examination determines a person’s health. Legal due diligence is a legal health check for a public or private company.
Who Is on the Due Diligence Team?
Before beginning a legal due diligence review, identify the parties to be included on the due diligence team. A team is generally made up of professionals with experience in the areas of law and finance.
The members of a due diligence team depend on the specifics of the transaction. It usually includes the acquiring and target companies, the buyer’s legal team and the seller’s legal team. A team may also include several specialists, such as tax, accounting, and business professionals. External counsel, industry specialists, technology experts, operational experts, and individuals with expertise in areas relevant to the transaction may also be included on the team.
Legal Due Diligence Checklist & Due Diligence Documents
It is crucial to create a comprehensive list of information and documentation to request from the target company. The documents help you assess the various types of due diligence in M&A to manage risks, including:
Legal due diligence
Financial due diligence
Operational due diligence
Commercial due diligence
Human resources due diligence
Environmental due diligence
Technical due diligence
The following legal due diligence checklist and documents help ensure that you receive the information necessary to protect your interests as you consider a merger or acquisition:
A. Corporate Structure and Governance
The corporate structure is the organizational framework of a company. Corporate governance is the system of practices, processes, and rules that control and direct business operations.
1. Articles of incorporation, bylaws, amendments, and other organizational documents
2. Shareholder and operating agreements
3. Equity capitalization table
4. Board and shareholder meeting minutes
5. Organizational structure
6. Operation and production processes
7. Stock purchase agreements
B. Financial and Tax Matters
Corporate finance includes capital structure, funding, and investment decisions that indifate a company's financial health. Tax matters include taxation and tax compliance for all types of taxes a company may be liable for, including employment, sales, and income taxes.
1. Past 3–5 years of audited financial statements
2. Tax returns, filings, and outstanding tax liabilities
3. Pending tax audits or tax disputes
4. Financial statements, income statements, and cash flow statements
5. Annual reports and SEC filings
6. Debt, financing, and credit agreements
7. Material financial obligations
8. Revenue and expense analysis and balance sheets
9. Financing arrangements and capital structure
10. Tax benefit agreements and property taxes paid
C. Contracts and Key Agreements
Contracts and agreements are legally binding. It is crucial to understand the contractual obligations that the buyer will assume during an M&A transaction.
1. Vendor and supplier contracts and a supply chain evaluation
2. Customer and client contracts
3. Licensing and distribution agreements
4. Lease agreements (real estate, equipment)
5. Change-of-control clauses and termination provisions
6. Supply chain management
7. Product and service portfolio
D. Employment, Labor & Human Resources
Employment and labor laws govern the relationship between workers and employers. It covers all key legal and compliance aspects, including wages, hiring practices, discrimination, working conditions, and termination procedures.
1. Employment contracts and offer letters
2. Independent contractor agreements
3. Employee compensation and benefits plans
4. Non-compete, confidentiality, and IP assignment agreements
5. Union status, pending disputes, or claims
6. Key employee retention plans
7. Health and safety records and policies
E. Intellectual Property
A company’s intellectual property is valuable. It is crucial to ensure that the company has taken steps to protect its intellectual property (IP) and has clear ownership.
1. Trademarks, copyrights, patents, trade secrets
2. Licensing agreements (inbound and outbound)
3. Open-source software use and compliance
4. IP ownership and transfer documentation
F. Litigation and Disputes
Inheriting lawsuits and legal disputes can result in costly problems for the buyer. A thorough investigation is necessary to ensure that all relevant matters are disclosed during due diligence.
1. Ongoing or threatened litigation
2. Regulatory investigations
3. Settlement documents and agreements
4. Insurance coverage and claims history
G. Compliance with Regulatory Requirements
Violations of regulations and laws imposed by governmental bodies could result in fines and other penalties. A company must have policies and procedures in place to ensure compliance with relevant industry-specific regulations.
1. Permits, licenses, and registrations
2. Industry-specific compliance (e.g., HIPAA, SEC, environmental laws)
3. Data privacy policies and cybersecurity practices
4. Anti-bribery and anti-corruption compliance
5. Quality control and product/service warranties
H. Real Estate
Real estate is another valuable asset. It is crucial to ensure the real estate is titled correctly and does not have any issues that could cause problems.
1. Owned and leased property documents
2. Environmental assessments
3. Zoning and land use issues
4. Title insurance and encumbrances
I. Environmental, Social, and Governance (ESG)
ESG is a framework for assessing how a company acts as a steward of the environment, manages relationships with suppliers, customers, employees, and the community, and how the company is led and managed. It helps assess environmental and sustainability concerns.
1. ESG policies and disclosures
2. Sustainability compliance
3. DEI commitments and programs
4. Environmental impact assessments
Performing legal due diligence can be a daunting task. Hiring an experienced Maryland business lawyer is the first step in developing and conducting a successful due diligence investigation. An attorney works with you to obtain the requested information, analyze the information, uncover hidden risks, and identify potential opportunities.
Red Flags to Watch for When Making a Due Diligence Request
When conducting legal due diligence, several things can raise red flags and cause concerns. Red flags during due diligence that indicate there could be a problem include:
Financial Red Flags – Undisclosed liabilities, missing historical financial statements, high debt levels, unclear ownership of physical assets, inconsistent financial records, old accounts receivable, and lack of financial transparency
Operational Red Flags – Inaccuracies in shareholder agreements, inefficient processes, outdated technology, and relying on a small number of key employees, vendors, or customers
Human Resources Red Flags – Compensation irregularities, unclear labor agreements, unresolved labor disputes, high turnover, allegations of employer misconduct, and unclear employee contracts
Market Position Red Flags – New industry rules that can adversely affect the company, lack of market analysis and industry trends, new competitors, relying on limited customers or products, declining market share, and reduced sales
IT and Cybersecurity Red Flags – Weak cybersecurity, outdated IT systems, relying heavily on outside IT services, poorly documented security practices, no multi-factor authentication, lack of data security, and an underfunded security budget
Compliance and Legal Red Flags – Regulatory violations, pending lawsuits or investigations, unfavorable contract terms, IP ownership issues, and unclear ownership records
Warning signs may indicate a company is in financial or legal trouble. These warning signs enable the acquiring company to address potential legal risks and issues before the acquisition. Red flag due diligence may be performed before legal due diligence to identify critical risks before the acquiring company makes a significant investment in an M&A or signs preliminary agreements.
Tips for Conducting Efficient Legal Due Diligence
Ensuring a smooth and efficient legal due diligence process ensures you receive accurate reports and helpful information. Tips for conducting efficient legal due diligence include:
Understand the Purpose and the Process
Seek legal counsel before beginning the legal due diligence process to gain insight into the purpose and process of due diligence. Understanding why this step of the M&A process is necessary and how it works helps you be a productive member of the team.
Collaborate with Professionals
Build a team of professionals with expertise in legal, financial, and industry-specific matters. Prepare work plans to assign roles and responsibilities to each team member. An attorney should coordinate legal due diligence to ensure efficient work and communication.
Using a Virtual Data Room
The virtual room is shared with the parties and their attorneys. The “room” enables parties to upload and review documents, as well as communicate safely with each other.
Prioritize Critical Issues
Outline the goals for due diligence, including what you want to achieve. Determine the key risk areas and prioritize relevant documents during your review. High-risk areas include regulatory compliance, financial projections, litigation, disputes, and intellectual property.
Start Early
Begin the legal due diligence process as early in the M&A process as possible. You have more time to gather and analyze documents to protect your interests.
Develop a Comprehensive Document Request List
Your document request list should cover all key areas in the due diligence process. The checklist needs to be tailored to the target company and its specific industry. Review and update your checklist periodically to ensure nothing is overlooked.
Final Thoughts
The legal due diligence process is crucial for mergers and acquisitions (M&As) to increase the likelihood of success after the transaction by minimizing legal and financial risks. Due diligence allows for informed decision-making. It provides the acquiring party with information to negotiate the most favorable terms and conditions while addressing potential issues before acquiring a company.
Proactive planning and expert legal guidance are the keys to avoiding costly mistakes during the due diligence process. A Maryland business lawyer also helps you negotiate an M&A agreement that is beneficial to your interests.
Contact Thienel Law for M&A support or a custom due diligence plan.
About the Author
Steve Thienel, Esq.
Steve Thienel is a business, estate planning, and tax attorney and the founder of Thienel Law, based in the DMV area. He helps entrepreneurs and business owners with entity formation, contracts, regulatory compliance, and long-term growth strategies. As a seasoned tax controversy attorney, Steve also represents clients in disputes with the IRS and state tax authorities. With over two decades of experience, he delivers clear, practical legal guidance tailored to the real-world challenges business leaders face.