KNOWLEDGE BLOG
Thorough due diligence on business acquisitions
15 September 2023
The path to a successful business acquisition is littered with opportunities and risks. One of the most important steps in this process is to conduct a thorough due diligence investigation. Conducting due diligence on a business acquisition is essential to identify risks and establish the value of the company. To do this, an experienced lawyer or due diligence team should take a structured approach and conduct a thorough analysis of the various aspects of the business, including: the financials, contracts, properties, employees, and compliance.
This legal knowledge blog provides valuable introduction with insights and tips for business owners to understand how to approach this research to minimize potential legal issues and achieve business success.
- Preparation: Begin the due diligence process early in the acquisition negotiations to enable timely decisions. Assemble a multidisciplinary team with legal, financial, and operational expertise to conduct the research. Also discuss the specific goals and scope of the due diligence investigation. This helps to focus on the most relevant aspects of the acquisition and prevents important issues from being overlooked.
- Financial data: The company's financials are analyzed to assess the company's profitability, solvency, and liquidity. This may include examining the financial statements, tax returns, and other financial reports. It's important to look into any tax liabilities, such as outstanding taxes or penalties, that could affect the value of the business. Hire an expert to assess the value of the business to be acquired and its assets. This will help to determine whether the asking price is reasonable and to provide a solid foundation for negotiations on the final acquisition price.
- Contracts: All of the company's contracts should be analyzed, such as: service agreements, customer contracts, supplier contracts, distribution agreements, maintenance contracts, employment contracts, and rental or lease agreements. This can help to identify risks that may arise from the transfer of these contracts to a new owner. A good relationship and possible new negotiations with existing contracting parties is important for a smooth transfer. Pay attention to any clauses regarding change of control, confidentiality, non-competition, and warranties to understand potential limitations and obligations.
- Properties: It is important to research the company's properties, such as real estate, intellectual property, property, and inventory. It is also important to check who exactly owns these assets (e.g. within a group structure) and whether there are any obligations on these assets, such as a mortgage or pledge.
- Employees: the relationships with the company's employees will have to be examined, such as the employment contracts and terms of employment. It is important to identify any risks that may arise from taking on these employees, such as employee claims.
- Compliance: It is important to examine the company's compliance with applicable laws and regulations, including environmental, labor, privacy, tax, and competition laws. Regulations depend on the country and industry in which the company operates. Failure to comply with these rules can result in significant fines and damage to the company's reputation.
- Legal disputes and claims: identify all potential risks and liabilities, such as disputes, uncertain contracts, liabilities and ongoing obligations. Evaluate the impact of these risks on the acquisition and determine whether measures are needed to manage these risks or to factor them into the purchase price.
- Warranties and indemnities: After identifying risks and obligations, negotiate warranties and indemnities with the seller to protect yourself from future claims and losses arising from these risks. Make sure that these warranties and indemnities are clearly set out in the acquisition agreement.
Thorough due diligence is an indispensable step in the business acquisition process. It helps business owners to discover hidden risks and make well-informed decisions. By taking the above aspects into account, you can conduct a thorough due diligence on a business acquisition and be better prepared to make an informed decision about the acquisition. Remember, engaging an experienced attorney and a multidisciplinary team of experts can be invaluable in navigating the complex process of a business acquisition.
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