The Importance of Due Diligence

Park Avenue Business Forum, 1st Edition, 2007

When making a large purchase, such as a home or a car, it is important to find out as much as you can about the item you are purchasing. The same is true when purchasing a business, notably when the purchase will be structured as a stock acquisition. Unlike an asset acquisition, where a purchaser may choose which business liabilities, if any, he is willing to assume, a purchaser in a stock acquisition generally inherits all of the liabilities of the purchased business. Therefore, completing a thorough legal “due diligence” review to uncover such liabilities is an essential part of the acquisition process.

Legal “due diligence” is the process by which the business’ records (as well as public filings pertaining to the business, such as trademark registrations or lien filings) are systematically examined by the potential purchaser or the purchaser’s legal representatives. Documents examined may include the business’ promissory notes and other loan documents, leases, organizational documents (e.g., articles of incorporation, bylaws, and shareholders agreements if the business is a corporation), or documents pertaining to previous or pending litigation or regulatory enforcement proceedings.

The records examined and the scope of review will vary depending on the type of business that will be acquired. For example, if the business is engaged in manufacturing, emphasis may be placed on examining the business’ warranty obligations and previous or pending product liability claims. If the business provides services, particular attention should be given to the business’ employee and independent contractor agreements. Also, if a business needs a particular license to operate, the due diligence review would uncover whether such license is in good standing or if any adverse action has been taken against the license holder.

Another important function of the due diligence review is to uncover whether the sale and purchase of the business itself will constitute a default under an existing contract. For example, sale of a business may trigger the default provisions of a loan, which could allow the lender to accelerate all payments due under the loan or repossess property that collateralizes the loan. If the repossessed property is a key piece of equipment needed for the operation of the business, the purchaser may find himself in a precarious position.

A thorough legal due diligence review of a prospective business protects the would-be purchaser by affording him or (her) the opportunity to assess the business’ liabilities before closing the sale, instead of having to confront the liabilities after closing. Armed with such information, the purchaser may be able to negotiate a more favorable purchase price or sale terms or could simply “walk away” from the deal.

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Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.

SHOULD WILL BE DONE?

Winter Park Home, Volume 5 / Issue 1, 2007

Jennie is a single parent with a 17-year old daughter, and a homeowner with limited additional assets. She also asks the classic question: "do I really need a will?" The answer, under the circumstances, is an unequivocal "it depends."

In many ways, wills are difficult and frustrating. There are many hard decisions to be made in distributing an estate, and people generally prefer to put off those decisions because they inherently address the finite nature of our existence.

Interestingly, a will cannot transfer Jennie's primary asset, her home, as long as her daughter is under the age of 18. The Florida Constitution provides that homestead property cannot be transferred by a will (devised) if the deceased has any minor children. As a result, her homestead property would be transferred under the intestacy statutes. Once her child turns 18 Jennie can devise her homestead to anyone she chooses. I advise Jennie that non-homestead real property and personal property can be devised at any time to anyone she chooses, but without a will all of her property will pass under the Florida intestacy statutes.

Under the intestacy statutes (an intestate estate is one in which the deceased is treated as having died without a will), her daughter will inherit all of Jennie's estate. If Jennie never prepares a will, never remarries, and never has another child, her entire estate will automatically pass to her daughter. Jennie's estate, of course, will have to be probated to legally establish this ownership of the real property.

Should Jennie have a will? If Jennie doesn't care what happens to her estate if her daughter dies first, the answer is no. However, if Jennie considers further scenarios, a will would be necessary.

When preparing a will, an attorney can help the client think of those alternative scenarios. For example, what if Jennie and her daughter died together in a car accident, and a probate court determined that her daughter died first? If Jennie had a will it would be effective to devise her home and remaining assets to anyone she designated.

Alternatively, with no will, all her property would be inherited by those designated under the intestacy statutes. In the absence of a will, the State of Florida intestacy statutes provide that the deceased's property will pass automatically to certain heirs of the deceased, in the specific order presented under the statutes (see note 1 at the end of this column). That may be an acceptable solution under many circumstances, but what if Jennie was estranged from her and wouldn’t want them to inherit her property? Without a will and with her daughter preceding her in death, Jennie’s parents would inherit everything.

In addition to prohibiting the devising of the homestead as long as her child is a minor, the Florida Constitution also includes one other limitation on devises of homestead. If Jennie remarries and her child turns 18, the only person she can leave the homestead property to is her spouse.

The intestacy statutes define the order by which heirs claim an interest in an estate when there is no surviving spouse. These same statutes also include provisions for a surviving spouse. If the homestead has not been validly devised to her spouse, he automatically receives a life estate in the homestead, while Jennie's daughter receives the remainder interest. Additionally, her spouse would be entitled to receive a substantial share of Jennie’s remaining estate, and her daughter would receive the balance (See note 2 at the end of this column).

Back to Jennie's initial question, "do I really need a will?" I told her that it depends on her goals. If she remains single, has no more children, and wants all her property to go to her daughter, then I can advise Jennie that, once probated, the homestead and all her remaining possessions, will ultimately go to her daughter even if there is no will.

I also ask Jennie if this is her only goal, and suggested that a will would enable her to state her preference for legal guardianship (both of the person and of the property) of her daughter, who is still a minor. A will would also allow her to designate alternate beneficiaries in the event that her daughter dies first.

Finally, I advise Jennie that the decision to create a will is hers alone. She should recognize that a will is the only tool she has to control how her assets will be distributed after her death and to nominate a guardian for her daughter.

Subject to the homestead limitations described above, wills provide an excellent opportunity to plan for your loved ones’ welfare, make charitable contributions, create trusts for your grandchildren, and designate preferences for a legal guardian. Failing to provide by a will is a lost opportunity, so it is highly recommended that you consult with your attorney and plan accordingly. Competent legal counsel can also provide advice concerning the impact of a subsequent marriage, children born after the execution of the will, prenuptial and postnuptial agreements, and generally assist in any estate plan.

Note 1: ORDER IF NO SURVIVING SPOUSE: Lineal descendants; deceased's father and mother; deceased's brothers and sisters; deceased's paternal and maternal kindred; kindred of the last spouse of the decedent; if applicable, a formula for related Holocaust victims; and finally, the State of Florida.

Note 2: SURVIVING SPOUSE RECEIVES: the entire estate (if no lineal descendants of the deceased); first $60,000.00 plus one-half the balance of the estate (if lineal descendants of the deceased are also the descendants of the surviving spouse); one-half of the estate (if any one or more of deceased's lineal descendants are not descendants of the surviving spouse).)

Visit our website for more information on this subject.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.