Aurora Solís
Senior Associate
Costa Rica
E-mail
What is due diligence, and why does it matter?
As a purchase and sale transaction approaches closing—whether involving a company, real estate, or other valuable asset—it is natural for the parties to want to finalize it quickly. However, in the rush to sign, a fundamental step is often underestimated: due diligence, which is essential to ensure the legality and success of the deal.
Due diligence is a comprehensive review and assessment process covering the legal, financial, accounting, tax, labor, operational, and often environmental status of the target asset or entity. Its primary purpose is to provide the buyer with a clear, objective understanding of what is being acquired—including hidden risks, undisclosed liabilities, or defects that could impact the operation or value of the asset.
Common mistakes in due diligence processes
A frequent pitfall is failing to allocate the time and depth this stage requires. Pressures to close, exclusivity deadlines, or fear of losing the opportunity can lead to rushed or partially skipped reviews.
This often results in serious consequences: unforeseen liabilities, legal claims, tax exposures, regulatory breaches, or structural issues that could have been identified earlier.
Another common mistake is treating due diligence as a mere formality or delegating it without proper oversight. Far from being just a document audit, it is a strategic analysis and legal protection tool.
Roles of the buyer and seller
While the primary responsibility lies with the buyer—who must ensure a full understanding of the acquisition—the seller also plays a key role. They must provide timely and transparent access to relevant information, act in good faith, and ensure the legal origin and traceability of the funds received from the sale.
How due diligence shapes the purchase agreement
A robust due diligence report has a direct impact on the quality of the final agreement. It allows the negotiation to focus on material issues, avoiding generic or irrelevant discussions and enabling targeted solutions to identified risks.
Additionally, it informs the structuring of key contractual protections, such as:
- Indemnities for undisclosed liabilities
- Escrow provisions for tax or labor contingencies
- Conditions precedent in case of uncertainty over asset ownership
- Strengthened warranties based on risk assessment
Conclusion: Investing in due diligence is protecting the transaction
Due diligence is not a pre-contractual formality—it is a critical phase in the purchase process that empowers informed decisions, precise negotiations, and risk mitigation. Skipping or minimizing it can seriously compromise the validity and sustainability of the agreement.
For that reason, engaging specialized, multidisciplinary legal counsel is essential to ensure a thorough and strategic review of the business transaction.
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