The broad purpose of conducting due diligence for transactions is twofold: first, to give confidence to a buyer that a target company is what the seller of that company holds it out to be, and second, to ensure that the target is materially compliant with laws that regulate the business of the target. Accountants and corporate lawyers typically focus on the first part, and subject matter legal specialists are engaged for the second part, which typically includes tax, environmental, intellectual property, information technology, real estate, executive compensation/ERISA, and labor and employment.
Where non-compliance is discovered in the course of due diligence, there are two issues: (1) What is the financial risk of exposure if government action is taken, or a lawsuit (perhaps a class action) is filed and (2) what is the cost of coming into compliance (and how will that cost affect EBITDA)?
