The phrase caveat emptor implies that those purchasing items from others need to take appropriate steps to protect themselves. Business owners, executives and investors typically need to protect themselves when preparing for a business acquisition transaction or a merger.
Proper due diligence or pre-transaction research is critical for the protection of those contemplating a large business transaction. Many investors and business leaders choose to partner with law firms that can assist with every step of the process, from drafting offer documents and reviewing final paperwork to performing due diligence before the transaction occurs.
What considerations require careful review and investigation before a merger or acquisition?
The state of the company’s finances
Those hoping to sell a business typically want to optimize the return on the transaction. They may achieve that goal by inflating the asking price or misrepresenting the company’s finances on paper. For example, the company may not accurately report the depreciation of high-value equipment and machinery that may be somewhat old.
The party selling the company might provide misleading figures regarding future revenue estimates. Those preparing for a merger or acquisition need to conduct a thorough review of all financial disclosures to ensure that the price offered or terms negotiated are reasonable.
The liability of the organization
Future and current liability are key considerations when negotiating terms for a merger or acquisition. Financial liabilities are important to review. The company may have worked as a factoring service or may have large outstanding debts to cover. Those obligations can cut into company profits for years to come.
Legal liability is another concern. Perhaps there has been an increase in customer complaints or an uptick in issues with workers. The organization could be at risk of product defect or harassment lawsuits. Purchasing or merging with a business typically results in a transfer of liability as well. It is therefore critical to identify potential sources of liability and either address them with special contract terms or adjust the price offered for the company to reflect the degree of risk.
Conducting an in-depth review with a skilled legal team before a large business transaction can require hundreds of hours of work spread out over many months. Those already running a business or managing their own careers may not be in a position to thoroughly investigate all of the relevant details that can impact a merger or acquisition transaction. Securing the right support before making any firm commitments regarding a business transaction can help protect those hoping to invest or to expand their business operations.