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Legal Due Diligence Checklist for Buying a Business

| John M. McCormick | ,

Quick Answer

Legal due diligence verifies what a buyer is actually acquiring: who owns the company and its assets, what contracts and obligations come with it, whether it is in compliance with the law, and what liabilities may exist. Key areas include corporate records, contracts, employees, intellectual property, real estate, litigation, licenses, liens, taxes, and insurance. Findings feed directly into the price, the purchase agreement, and the decision to close.

This article is part of our Legal Guide to Buying or Selling a Business.

Financial diligence asks whether the numbers are real. Legal diligence asks whether the business can legally deliver what the buyer is paying for. Both matter, and they should run together. Below is a working checklist we adapt for each transaction. Not every item applies to every deal, and some industries require more.

Corporate and Ownership Records

  • Formation documents, bylaws or operating agreement, and all amendments
  • Ownership ledger or cap table, and any options, warrants, or promised equity
  • Minutes and consents approving major actions
  • Good standing certificates in the formation state and every state where the company is registered to do business
  • Buy-sell or shareholder agreements that could restrict the sale

Contracts

  • Customer and supplier agreements, especially the largest by revenue
  • Assignment and change-of-control clauses that require consent or allow termination
  • Exclusivity, most-favored-customer, or non-compete terms that bind the company
  • Loans, guarantees, equipment leases, and other debt instruments
  • Government contracts and related compliance obligations

Employees and Contractors

  • Employee census, compensation, and key employee agreements
  • Independent contractor classification
  • Benefit plans and any unfunded obligations
  • Existing non-compete, non-solicitation, and confidentiality agreements
  • Pending or threatened employment claims

Intellectual Property and Digital Assets

  • Trademarks, copyrights, and patents, and who actually owns them
  • Domain names, websites, and social media accounts, often held in an owner's personal name
  • Software licenses and whether they transfer
  • Confidentiality and invention assignment agreements with employees and developers

Real Estate and Equipment

  • Leases, including term, renewal options, assignment provisions, and landlord consent requirements
  • Deeds, title, and any environmental concerns for owned property
  • Equipment lists matched to actual ownership and any liens

Litigation, Liens, and Compliance

  • UCC lien, judgment, and tax lien searches
  • Pending, threatened, or recently resolved lawsuits and regulatory matters
  • Business licenses, professional licenses, and permits, and whether they transfer
  • Data privacy, safety, and industry-specific compliance

Taxes and Insurance

  • Federal, state, sales and use, and payroll tax filings and any open audits
  • Insurance policies, coverage limits, and claims history
  • Whether coverage for pre-closing events will continue after closing

Where to Search in Virginia and North Carolina

  • Virginia entity status and filings: the State Corporation Commission (SCC) Clerk's Office, which also maintains Virginia's central UCC filings
  • Virginia judgments, land records, and fixture filings: the circuit court clerk in each locality where the business operates or owns property
  • North Carolina entity status: the Secretary of State, which issues a Certificate of Existence and maintains UCC filings
  • North Carolina land records and judgments: the county register of deeds and the clerk of superior court
  • Professional and trade licenses: Virginia's Department of Professional and Occupational Regulation (DPOR) and North Carolina's individual licensing boards, such as the Licensing Board for General Contractors
  • Local business licenses: in Virginia, each county, city, and town decides whether to impose a business license and BPOL tax (Va. Code § 58.1-3703), so check the ordinance for every location and confirm the seller's account status
  • Sales tax status: a Virginia Department of Taxation clearance under Va. Code § 58.1-629, and in North Carolina a statement from the Secretary of Revenue under N.C. Gen. Stat. § 105-164.38 that the seller's sales and use taxes are paid or that none are due

Our Virginia and North Carolina guides explain these state-specific steps in more detail.

What Happens If Diligence Finds a Problem?

Most problems do not kill a deal. They change it. Depending on the issue, the parties may adjust the price, require the seller to fix the issue before closing, add a specific indemnity, increase an escrow or holdback, make a consent a closing condition, or change the structure. For example, significant unknown liability risk may push a buyer toward an asset purchase, as discussed in our article on asset purchase vs. stock purchase. The time to plan for these outcomes is when the letter of intent is negotiated.

Attorney Insight

Run lien and judgment searches early, not the week before closing. I have seen equipment pledged to a lender the buyer did not know about, and payoff letters that took weeks to obtain. Finding these early gives everyone time to solve them without moving the closing date.

Frequently Asked Questions

How long does legal due diligence take?

It depends on the size and complexity of the business and how organized the seller's records are. A prepared seller with an organized data room can shorten the process considerably.

Is due diligence different in an asset purchase?

The focus shifts. In an asset deal, the buyer concentrates on the assets and assumed liabilities. In a stock deal, the buyer inherits the whole company, so diligence must be broader.

Who pays for due diligence?

Each side typically pays its own costs. The LOI should say so.

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Talk With an M&A Attorney Before You Sign

McCormick Law & Consulting represents buyers and sellers in business acquisitions, primarily in Virginia and North Carolina and in transactions that cross state lines. The transactions in which we have represented a party total hundreds of millions of dollars in combined deal value, a measure of the size of those deals, not of amounts recovered or earned for clients. We have formed roughly a thousand new business entities and currently represent hundreds of businesses, so we approach every deal from the operating side as well as the legal side. Every transaction is different, and the size or outcome of past deals does not predict the result in yours.

With offices in Norfolk, Virginia and Raleigh, North Carolina, we handle most of our transactions in those two states and also assist clients with multistate transactions. If you are buying or selling a business, a short call early in the process can save time, money, and leverage later. Learn more about our mergers and acquisitions practice.

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This article provides general information only. It is not legal, tax, or financial advice and does not create an attorney-client relationship. Laws differ by state and change over time. Our attorneys are licensed in Virginia and North Carolina. We assist clients with business transactions involving multiple states. For matters involving the law of a state where we are not licensed, we associate with appropriately licensed counsel or otherwise proceed only as permitted by applicable law.