Due Diligence

Scoping the review and the document request

Diligence done well starts before the first document opens. We build a request list keyed to the actual deal rather than a generic checklist: entity and capitalization records, material contracts, intellectual property, employment and benefits, tax filings, litigation, real estate, environmental, insurance, and the industry-specific items the target’s business requires. The list gets sized to materiality thresholds set at the letter-of-intent stage, so a $4 million acquisition isn’t papered like a $400 million one. Over-collecting wastes the diligence window; under-scoping leaves the buyer holding risk no one priced.

Access runs through a confidentiality agreement and, for competitively sensitive targets, a clean-team protocol that walls pricing and customer data off from the buyer’s operating staff until closing. The seller populates a data room; we index what’s there against the request list and, more usefully, track what’s missing. The corporate records a Washington entity is required to keep under RCW 23B.16 (corporations) or RCW 25.15.136 (LLCs) are the first tell. A company that can’t produce its own minute book, stock ledger, or operating agreement usually has governance gaps that resurface later as title or authority problems.

Corporate, capitalization, and contract diligence

The threshold question in any acquisition is whether the seller actually owns what it’s selling, and whether it can transfer that ownership without tripping a consent. We confirm the entity’s good standing, trace the capitalization table from formation through every option grant, SAFE, convertible note, and stock transfer, and reconcile what the cap table says against what the corporate minutes authorized. Closely-held companies routinely carry quiet defects here: options granted without board approval, SAFEs that never converted, founder shares issued without a written purchase agreement, a departed co-founder whose equity was never formally bought back. Authority to sell corporate stock or assets requires board and often shareholder approval under RCW 23B.12; LLC transfers require member consent under RCW 25.15.

Material-contract review is where deal value most often moves. We read the customer, vendor, lease, licensing, and financing agreements for the terms that bite on a change of ownership: anti-assignment clauses that require a counterparty’s consent before the contract can transfer, change-of-control provisions that let a customer walk or a lender accelerate, exclusivity and most-favored-nation terms, and auto-renewal traps. In an asset deal, every assigned contract may need a counterparty signature; in a stock deal, a change-of-control clause can be triggered by the transaction itself. Customer concentration, one account that is 40 percent of revenue sitting on a thirty-day termination right, is the kind of finding that resets a price.

Employment, benefits, and intellectual property diligence

Employment exposure is the most common surprise in closely-held diligence because it rarely shows up in the financials. We review worker classification, wage-and-hour practice, restrictive covenants, and any pending or threatened claims. Independent contractors who function as employees create back-tax, overtime, and benefits liability under the Fair Labor Standards Act (29 U.S.C. § 201) and Washington’s wage statutes; RCW 49.52 carries double-damages exposure for willful withholding, which turns a bookkeeping habit into a real number. Deferred-compensation arrangements that don’t comply with IRC § 409A create employee-level tax exposure the buyer inherits, and that one hides well in a closely-held company that drafted its own bonus plan.

Intellectual property diligence confirms the target owns the IP its business runs on. The recurring defect: code or designs built by contractors without a written assignment. Absent a work-made-for-hire agreement or an express assignment under 17 U.S.C. § 101, the contractor, not the company, may own the copyright in what the buyer thinks it’s paying for. We confirm trademark and patent assignments are recorded, check that employees signed invention-assignment agreements, trace the chain of title on the core IP, and, for software targets, review open-source license compliance and data-privacy obligations. A buyer paying a premium for proprietary technology wants to know the company actually holds it.

Tax, environmental, and regulatory diligence

Some liabilities follow the business regardless of how the deal is structured, and tax is the clearest example. In Washington, unpaid business taxes can become a successor liability: under RCW 82.32.140, a buyer who acquires a business can be held liable for the seller’s unpaid Business & Occupation and sales taxes unless the tax-clearance procedure is followed before closing. We confirm the target’s B&O, sales, and use-tax filings are current and check nexus exposure in other states. For stock deals, the buyer inherits the entity’s entire tax history, which is what moves the tax representations and indemnity from boilerplate to the center of the agreement.

Environmental diligence matters wherever the target owns or operates on real property. Federal successor liability under CERCLA (42 U.S.C. § 9601) and Washington’s Model Toxics Control Act (RCW 70A.305) can attach to a current owner for contamination caused decades earlier by someone else; a Phase I environmental site assessment is the standard tool for establishing the innocent-purchaser defense. On the regulatory side, we map which licenses and permits transfer with the deal and which require fresh application, since state-issued liquor, healthcare, and professional licenses generally don’t move with assets. Getting that timeline wrong is what turns a planned thirty-day close into ninety.

From findings to deal terms

Diligence isn’t a report; it’s an input to the deal. We triage findings into four buckets: deal-killers that end the transaction, price adjusters that move the number before signing, indemnity items the purchase agreement’s reps and warranties will cover, and post-closing covenants the parties live with afterward. A misclassified workforce might be a price adjustment plus a specific indemnity. An unrecorded patent assignment might be a closing condition the seller has to cure. A customer-concentration risk might become an earn-out instead of a discount. The findings shape the disclosure schedules, which qualify the seller’s representations and define exactly what the buyer is and isn’t accepting.

For sellers, we run the same review in reverse. Sell-side diligence means finding and fixing the problems before a buyer’s counsel does, so the surprises don’t arrive mid-deal when leverage has already shifted. A clean diligence binder built before the letter of intent lands shortens the buyer’s review, supports the asking price, and keeps the seller from re-trading against its own disclosures. Whichever side we’re on, the discipline is the same: surface the real issues early, set the noise aside, and put what we found into terms the client can live with after closing.