Due Diligence in Acquisitions
Every corporate acquisition must involve a thorough assessment of a potential firm in order to be successful. This process, also known as a “due diligence evaluation” or “due diligence review,” entails thoroughly assessing the company that is being acquired (the target) in terms of its assets, liabilities, litigation risks, intellectual property issues, and other factors that may affect the viability and desirability of an acquisition.
Hiring legal counsel that is knowledgeable about mergers and acquisitions is the most realistic way to ensure that a complete due diligence examination is done. The following are among the most critical factors to consider while conducting due diligence on a potential acquisition.
Financial state of the company – Financial statements, liabilities, profits, projections, and anticipated capital expenditures should all be carefully examined. Due diligence is usually the first step in this process.
Customer and sales-related issues – The company’s client base should be extensively evaluated during due diligence. Customer concentration problems, customer retention after an acquisition, whether the sales pipeline has been actively maintained, unusual patterns in returns, exchanges, or refunds, seasonal sales cycles, customer satisfaction, and others are all things that the buyer should be aware of.
Contractual obligations of the company – Loans, credit agreements, settlements, leases for required equipment, joint venture agreements, employment agreements, exclusivity agreements, and real estate leases are also among the possible agreements that need to be taken into consideration. One of the most significant concerns for a buyer to thoroughly analyze is their existing obligations.
Pending and potential lawsuits – Any pending or threatened litigation in which the target firm is involved or may become involved should be carefully considered by the buyer. This often involves assessing any complaints that have been filed, threatened claims, the resolution of previous litigation, letters to or from attorneys, issues that are in arbitration, administrative issues involving government agencies, and settlement agreements that have been executed.
Broader concerns about the company – It is highly recommended that the prospective buyer conduct a thorough review of corporate records and organizational documents, such as the articles of incorporation, bylaws, corporate officers and directors list, stock sale agreements, and a list of states in which the company is authorized to conduct business, among other factors. You can assess the credentials of company officers and directors, as well as any related risks by reviewing the list of the individuals involved in the company.