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Newco Project Ii

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Newco Project II

Wilfret Anderson

Daphne J. Dorman

Edsel Goyo

Isabel Pereira

Law 529: Legal Environment of Business

University of Phoenix

David Sabot, Esq.

May 30, 2006

Part A - Legal Due Diligence Checklist

Assessing risks and issues while determining whether to purchase a company is the number one skill venture capitalists must possess. The prospective buyer of Five Friends Construction must investigate and gather all information about the company and its business assets. The

purpose of this it to decide whether to proceed with the initial transaction on the initially discussed terms, establish areas of risk that need particular attention or, if justified, withdraw from the proposed investment (Global Law Review, 2005). Creating a due diligence checklist is the way to critically assess a companies current and potential profitability.

Elements of Legal Due Diligence Checklists

There are at least sixteen elements of a Legal Due Diligence checklist. The organization and its good standing, financial information, physical assets, real estate, intellectual property,

employees and employee benefits, licenses and permits, environmental issues, taxes, material contracts, product or service lines, customer information, litigation, insurance coverage, professionals, and articles of publicity completes a thorough list of risks to research before purchasing a company (FindLaw, 2005). While each of these list items is important, four major issues arise and the focus will remain on them. Financial information, employees and employee benefits, environmental issues and a litigation summary are the focus of acquisition.


The financial health of a company is the number one concern of a potential buyer. The selling company should provide the seller with audited financial statements for the last three years, a schedule of inventory, a schedule of accounts receivable, a schedule of accounts payable, a schedule of indebtedness and contingent liabilities, an analysis of fixed and variable expenses and a copy of the company general ledger (FindLaw, 2005). The analysis of the accounts payable and accounts receivable of a business is essential. Accounts payable are the bills that are unpaid by a business. Accounts receivable are the unpaid customer bills and any other money owed to the company. The health of a company depends on revenue. The accounts receivable of Five Friends Construction must be higher than the accounts payable.

This shows an ability to keep general expenses down while keeping revenue flowing into the companies back account. The higher the accounts receivable the more financially stable a company is currently and will be in the future.


Employees are often a company's most important asset. The understanding of each employee as well as trends among a group of employees must be addressed before acquiring Five Friends

Construction. A list of all current and former employees including positions, current salaries and bonuses paid during the last three years, a copy of the personal handbook and a schedule of

employee holiday, vacation and sick leave policies, descriptions of all retirement plans, copies of collective bargaining agreements, a description of employee problems over the last three years,

including wrongful termination, harassment and discrimination cases are all key parts of assessing a company when deciding to purchase (FindLaw, 2005).

The history of discrimination and lawsuits surrounding this history needs to be considered when purchasing Five Friends Construction. In the employment context the right of equal protection limits the power of the state and federal governments to discriminate in their employment practices by treating employees, former employees, or job applicants unequally because of membership in a group (such as a race or sex). Due process protection requires that employees have a fair procedural process before they are terminated if the termination is related to a "liberty" (such as the right to free speech) or property interest. State constitutions may also afford protection from employment discrimination (Legal Information Institute, 2005). The

above directly relates to governmental bodies. However, federal and state statutes have regulated the private sector similarly to the governmental bodies, to the point where if there is any history of discrimination it may not be beneficial to purchase a company.


Construction companies are notorious for legal risks arising from environmental law. The due diligence checklist must include, environmental audits for all construction sites, a list of hazardous substances used by the company, a description of disposal methods, a list of

environmental permits and licenses, copies of all correspondence between the company and the Environmental Protection Agency, any pending or past litigation regarding the environment

(FindLaw, 2005). Businesses that comply with environmental laws and land use regulations are likely to avoid exposure to liability for toxic torts. Some business owners are so concerned over

potential liability that their environmental concerns may make or break deals. The laws regulate numerous activities ranging from the handling of dangerous chemicals and the disposal of toxic waste to the building of new facilities and the rights of workers to know which chemicals are present in the workplace (Guide to Florida Law, 2005). Avoiding cases such as Plaintiff v. Asbestos Manufacturers, Distributors and Insulation Contractors, State Court of Fulton County, Georgia (5/31/99) where 4.1 million dollars was awarded to the plaintiff, are the reason assessing environmental risk is important before purchasing a business.


In addition to the above mentioned legal risks, all exposures due to litigation should be reviewed. Most cases that are settled in court have the potential for enormous payouts. One of these payouts could easily put a small company such as



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