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How Buyers Lose Capital – Neglecting Legal Diligence

Elliott Holland
Elliott Holland
Supporting investors new to direct private equity deals

Last words of a business buyer who will lose money:

“Oh Elliott, I leave all of that legal stuff to my lawyer”

Yikes! You might be amazed but I hear variations of this all of the time. People forget the power of the legal documents in a transaction. The legal documents can mitigate key risks identified during due diligence but only if the buyer is consistently communicating to his/her lawyer. The lawyer won’t know the financial and operational risks like the buyer will. Customer concentration? Risk of key employees leaving? Will the seller compete with you post-close? What remedy does the buyer have if the seller leaves 3 months into the deal and does not fulfill their employee agreement?

All of those challenges get mitigated in the legal docs. So a wise investors works hand-in-hand with their lawyer. This is a key reason that legal diligence is always a part of the processes we lead.

TopTal has a great and detailed article on this topic that can be found here: https://bit.ly/2ZgBMYO

An except is below:

At Guardian we have a list of preferred lawyers who understand the risks we focus on during diligence. We start early identifying key deal risks and the best mitigants so that during the process the buyer can feel comfortable about their investment with knowledge of how they will be protected in the purchase agreement.

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