The Law Offices of Paul H. Appel – Your Trusted Business Law Partner in New Jersey
Due Diligence · Who Does What
Buyers often say they are “doing due diligence” as if it were one task. In practice three different reviews answer three different questions, and gaps open up when nobody owns the space between them.
The distinction
Financial due diligence asks whether the business really earns what it appears to earn. Legal due diligence asks whether the business owns what it claims, can keep doing what it does, and carries obligations or claims that could cost the buyer. Operational due diligence asks whether the business will actually run under new ownership — its systems, people, suppliers and processes.
All three matter. A company can have accurate books and still hold a lease that ends next year; it can have spotless contracts and still depend on one employee who is leaving with the seller. The buyer needs the full picture before committing.
Side by side
| Financial (incl. quality of earnings) | Legal | Operational | |
|---|---|---|---|
| Core question | Are earnings real and sustainable? | Are rights and obligations what the seller says? | Can the business run without the seller? |
| Usually led by | Accountant or financial adviser | Transaction attorney | Buyer, often with industry advisers |
| Main sources | Ledgers, bank statements, tax returns, payroll | Contracts, corporate records, leases, permits, public searches | Site visits, staff interviews, systems, supplier terms |
| Typical findings | One-off revenue, owner expenses, working capital needs | Consent requirements, liens, claims, ownership gaps | Key-person dependence, outdated equipment, weak systems |
| Where it lands | Price, working capital target, earnout | Representations, indemnities, closing conditions | Transition plan, retention terms, seller consulting |
Tax questions sit across the first two columns: the accountant assesses exposure and structure, while the attorney makes sure the agreement allocates responsibility for it.
Quality of earnings
What it is
A quality of earnings analysis adjusts reported profit for owner perks, unusual items and accounting choices to show what a buyer can expect the business to earn. Buyers and lenders often rely on it to test the asking price.
When it fits
For larger or more complex businesses it is common. For a small owner-operated company, a narrower accountant's review of tax returns and bank statements may be a sensible substitute; that is a judgment for you and your accountant.
Its limits
A QoE will not tell you that a customer contract terminates on a change of control, that equipment is subject to a lender's lien, or that a key license is in the owner's personal name.
Coordination
The most expensive surprises tend to fall between disciplines: an issue the accountant noticed but did not think was legal, or a contract term the lawyer flagged without knowing its effect on revenue.
A few examples. A revenue spike in the last year might be a one-off contract that the accountant adjusts out — but the lawyer needs to know whether that contract has guaranteed renewals. Payroll that looks lean may reflect workers paid as contractors, which is a financial observation with legal consequences under New Jersey's ABC test — a subject covered in depth under employment issues in acquisitions. Deferred revenue on the balance sheet may correspond to customer prepayments the buyer will have to honor.
The firm works directly with your accountant and other advisers so findings are shared as they arise, and so that each one ends up in the right place — the price, the agreement or the transition plan. Paul H. Appel has practiced business law since 1967 and is used to acting as the hub between those advisers within the firm's M&A services.
Practical approach
At kick-off, list each subject and assign it to the accountant, the attorney or the buyer, so nothing is assumed covered by someone else.
A single, numbered list sent to the seller avoids duplicate requests and lets every adviser see the same documents.
Brief calls between advisers during the review catch cross-discipline issues early.
Before drafting is finalized, the main findings from all three reviews are brought together so the agreement reflects the full picture. The legal side is described under legal due diligence services.
Questions & answers
Financial due diligence tests the numbers: revenue, profit, cash flow, working capital and tax filings. Legal due diligence tests rights and obligations: ownership, contracts, leases, permits, liens, employment arrangements and claims. They overlap on taxes and on contracts that drive revenue, which is why the two advisers need to talk to each other.
Not always. Lenders sometimes require one, and it is valuable when earnings are complex or heavily adjusted. For a smaller owner-operated business, a focused accountant's review of tax returns, bank statements and the seller's add-backs may be proportionate. Your accountant is best placed to advise on the right level of financial review.
The buyer leads, because the buyer makes the decision. In practice the transaction attorney often coordinates, because legal findings and financial findings both end up in the purchase agreement. What matters most is that someone owns the overall list and that advisers share findings promptly.
It is the buyer's assessment of how the business actually runs: its staff and key people, suppliers, equipment, systems, customer relationships and day-to-day processes. It is often done by the buyer personally or with industry advisers. Its findings shape the transition plan and terms like seller consulting or key-employee retention.
Your attorney
Every matter at the firm is handled personally by Paul — the same attorney reads the documents, gives the advice and negotiates on your behalf.
Contact
Describe what the business is dealing with — a contract on your desk, a deal in progress, a dispute or a company you are about to form. You will hear back from the attorney who handles the work.
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