From NDA to Closing: How Legal Due Diligence Shapes Private Equity

CC: Alessandra Albescu

Recently, I attended a workshop of a US law firm in London, in which a trainee explained how the legal due diligence shapes an M&A transaction inside their P&E division. This article will explore the documents involved, the timeline and the processes performed in order to close a deal.  If there is one thing that remained with me after this workshop, it is that commercial acumen is fundamental to working as a lawyer. In fact, as explained by the trainee, the firm pays for finance courses for the trainees coming from non-legal bachelor's degrees. This article aims to provide a glimpse into the legal due diligence process as practised in the London office of a major U.S. law firm.

I am going to start by explaining in simple terms what private equity is. For those who want concepts explained quickly: it’s like buying a broken car, fixing it, and selling it for a profit. For those that love a good, complex definition: private equity transactions resemble classic corporate M&A deals — the only difference is that the clients are private equity firms, not corporations. PE lawyers “buy and sell companies for a living,” helping funds execute investments and exits.

PE firms typically invest through limited partnerships -  a tax-efficient structure where investors (like pension funds) are limited partners and the PE firm acts as the general partner. The money is used to buy stakes in private companies, called portfolio companies, which will eventually be sold. A “good exit” -  such as a sale to another fund or a public listing -  is key to returning profits to investors.

The Non-Disclosure Agreement (NDA) is the very first legal document in the acquisition process. Before any data is shared, both buyer and seller must sign an NDA to ensure confidentiality. An NDA  restricts how information can be used, shared, and stored. It might also include non-solicitation clauses (preventing the poaching of staff) or standstill clauses (limiting unsolicited bids). Once the NDA is signed, the buyer can access the virtual data room (VDR) -  thesecure online platform where the seller uploads key corporate files.

If the buyer remains interested, the next step is signing a Letter of Intent (LOI), also known as the Heads of Terms. This is a non-binding document setting out the high-level deal terms - price range, structure, timeline, and exclusivity.It ensures both sides agree on the broad commercial logic before lawyers and advisors spend time (and fees) diving deepinto the target’s details.

Once the LOI is in place, the heavy lifting begins: legal due diligence.

This process is often junior-lawyer-led, but it requires coordination across multiple teams and jurisdictions. The buyer’scounsel will:

1. Define the scope: which business areas and countries are relevant?

2. Send a due diligence request list to the seller.

3. Assemble teams (corporate, finance, employment, IP, litigation, real estate) across offices worldwide.

All documents are stored in the data room. In the UK, lawyers often check filings on Companies House to verify ownership, filings, and charges.

During the conference, the trainee explained that lawyers use a template diligence report. Each team — e.g., employment, finance, litigation -  fills in their sections, which are later edited into one cohesive report that “reads as if written by one person.” Presentation matters: the final product must look good, sound good, and clearly highlight risk.

Legal due diligence involves a network of specialist teams, each addressing a different risk area:

• Finance Team: Reviews existing loans, credit facilities, and repayment terms. They check whether lenders can demand early repayment following a change in ownership. They also check the current stage of the company’sdebt. 

• Employment Team: Examines contracts for key executives and staff, ensuring compliance with labour laws, pension schemes, and compensation arrangements. For example, if an employee can be licensed immediately without prior notice, or they can leave without any prior notice, it represents a red flag, and needs to be signalled.

• Litigation & Disputes Team: Identifies ongoing or potential legal claims and assesses their impact. If material liabilities exist, the buyer may seek an indemnity clause or reduce the purchase price.

• Intellectual Property (IP) & Real Estate Teams: Confirm ownership of IP and verify property leases, checking whether landlords can terminate leases easily or impose restrictive terms.

All findings are consolidated into the Due Diligence Report, summarising: what the company legally owns and operates, any identified risks or “red flags”, and recommended legal protections.

These findings directly inform the Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA). Clauses on representations and warranties, indemnities, and closing conditions are often written based on the diligence report.

Why does it matter…

While legal due diligence might appear administrative, it is actually the core of transaction risk management. A missed liability, a hidden litigation, or a flawed contract clause can completely change the economics of the deal. Therefore, everything is put under scrutiny to avoid unpleasant surprises later in the deal. The legal due diligence is the unseen foundation that supports every acquisition, turning uncertainty into informed confidence.