Due diligence is an important step in mergers and acquisitions. The buyer, with the help of his legal advisers, accountants, and industry experts, should thoroughly scrutinize the company before making any commitments. Extensive due diligence is particularly necessary when merging with or buying a private firm whose records are not in the public domain.
When it comes to conducting this investigation, most business owners focus on financial matters. However, there are other checks that, when performed, can minimize the risk of buying into a business with risks that could expose the buyer to liability. Therefore, as you conduct due diligence for a merger or acquisition, pay attention to the following checks:
Corporate Agreements and Contracts
Various agreements and contracts are reviewed during a merger or acquisition. However, beyond the usual financial contracts, it's paramount to evaluate documents such as the following:
Thoroughly review all these contracts with the help of a risk advisor and business transaction attorney. Check for any loopholes, loose ends, vague contractual terms, or complications that could arise from the terms therein. Also, check that any confidential documents or information are secure to avoid liability.
In today's world where technology has taken over the marketplace, it is not advised to enter into a merger or acquisition without reviewing the seller's stance on tech. What's the extent and quality of the company's technology? How has it performed thus far? Does the other party have any plans to improve or upgrade business technology?
Check all tech-related documentation and correspondences as well. How has the company handled cybersecurity issues? Have there been any instances of data breaches in the past? Does the firm comply with intellectual property regulations? Buying into or merging with a firm that has slacked on technology management can increase the risk of data breach and litigation.
Past and Current Litigations
Proper due diligence calls for an in-depth analysis of any past and current litigation against the company. Ask for all records of any settlements and lawsuits that the company may have been involved in. Gather information on mediations and arbitrations as well. Examine the matters therein to determine their present and future effect on the firm's operations, finances, and reputation.
For example, cases relating to a breach of employment law, sexual harassment, defective products, or corruption can adversely affect various aspects of the firm. If such records went public, they could ruin the firm's reputation and affect relationships with prospective employees, customers, and sponsors. Evaluate the risk attached to the litigations and their effects on the transaction.
Before committing to a merger or acquisition, consult a business transaction law service that can help you conduct professional due diligence, and reduce the risk of future litigation and liability
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