1. There is no single algorithm to apply when a potential acquirer prepares and conducts legal due diligence. Any legal due diligence has to be customized to be successful. Understanding the business of as well as the acquirer’s plan for the target group is key to a successful due diligence.  No two acquirers or two targets are the same.
2. Many factors must be considered in this respect, including the target’s risk expo-sure, materiality thresholds, negotiation strategy and the expected level of representations, warranties and indemnifications just to name a few matters.
3. The overall purpose of a legal due diligence is almost always the same: to identify and handle actual and potential legal liabilities and obstacles in the target group. Equally important is the transformation of the due diligence findings into the right form of risk allocation.
4. The majority of all findings made during due diligence should have one or more of the following consequences:

• Reduction of the purchase price
• Specific indemnities, representations or warranties
• Closing conditions or closing delivery
• Post-closing implementation

5. How potential acquirers achieve the basis for making an informal investment decision and satisfactory allocation of risks determines the difference between a successful and an un-successful legal due diligence.
6. Some of the most important issues to be addressed before and during a legal due diligence are listed below. It is essential to have a clear picture of the means and ends of the process:

• Scope:  To be specific about the scope and expected outcome is essential. The scope should be defined in close cooperation between acquirer and advisor. Scope includes (i) deciding on areas of due diligence (risk management), (ii) setting the threshold for findings to be reviewed/reported (monetary threshold), (iii) deciding on form, content of reporting (see below), (iv) request procedure and coordination, etc.
• Mission & Strategy:  How are due diligence findings to be used during subsequent negotiations of the transaction documents.   Acquirers often choose different approaches in auction processes and exclusive deals. Who is the seller and what is important for the seller for some sellers price is key. For others asking for indemnifications is per definition “no-go”. Identify the best way to support your findings and instruct your advisors accordingly.
• Team:   Make sure you select an experienced advisor with years of experience in conducting legal due diligence, drafting and negotiating transaction documents. Your day-to-day advisor may not be the right choice. It is important that the due diligence team knows how to identify, prioritize, contextualize and present the findings in a meaningful and pro-active way. A small, specialized and experienced team often provides the best results at the lowest cost.
• Interaction between advisors:   A due diligence can be a sizeable project and is often carried out under severe time constraints with a range of advisors that need to share the acquired knowledge as efficiently as possible. Consider carefully how this project is to be managed, how often meetings are to take place, who is to be in charge of what and who is to be responsible for the various deliverables.
• Vendor due diligence:   Often seller’s advisors have prepared a vendor due diligence report, covering the target company or selected areas. Such report often provides useful support and assists the potential acquirer. However, it is a pivotal factor that the acquirer’s reliance on the vendor report is clarified. If the acquirer has full reliance this may impact the scope of the due diligence.
• Form of the due diligence report, Request a report, fulfilling the purpose, scope and mission of the due diligence:  Experienced due diligence teams have developed various types of formats for such reports. Consider whether content reporting is necessary and in the affirmative be specific on the agreements/contracts where content should be reported.

7. A due diligence report should not be about an executive summary and a long content report within various legal areas. A due diligence report should contain a clear prioritization of the most important findings, advisors’ comments thereto and recommendations on how to address such findings. Basically, the report should be a tool for the potential acquirer to make the legal and commercial decisions on how to address key findings.