Due Diligence in Mergers and Acquisitions
Mergers and acquisitions (M&A) are two different types of business transactions that involve the combining of two companies into one single company. These often have dramatic effects on companies, as well as all stakeholders such as the owners, management, employees and the customers the companies serve. Because of this, it is important to make sure that due diligence is performed by all parties before the transaction takes place. This protects the interests of both companies and ensures the transaction goes smoothly.
Due to the complex nature of M&A transactions, it is advised to consult with an attorney specializing in mergers and acquisitions.
Due Diligence Checklist
As mentioned previously, mergers and acquisitions are complex transactions that require not only strategic business planning but also due diligence to ensure all legal matters are properly handled. Below is a checklist of the major aspects of what should be covered when conducting due diligence:
Corporate Structure – The buyer’s corporate attorneys will want to review the target company’s structure, organizational documents and company records to make sure everything is correct and in order.
Tax Liabilities – The buyer’s corporate lawyers will ensure that the target company’s taxes are current and there will be no unforeseen tax issues. This is a critical part of the due diligence process as tax liabilities, audits or problems can cause the buyer to reconsider the merger or acquisition.
Strategic Fit – It is important that the buyer explores and understands how the target company will strategically fit within their existing business and/or how the two companies will be able to work together in the future.
Intellectual Property – It is advised as part of due diligence that the buyer work with an intellectual property lawyer to accurately assess the scope and quality of the technology and intellectual property of the target company. This verifies the intellectual property value of the company to be purchased.
Physical Assets – This is one of the key points of due diligence in an M&A transaction. When evaluating and appraising the material assets of the target company, it’s important to keep in mind the total value of all assets and any potential debts and/or liabilities held against them.
Contracts – Reviewing all material contracts and/or commitments of the target company is by far the most time consuming part due diligence in an M&A transaction. The buyer’s corporate attorney will review all current contracts that involve the target company, which is important to make sure the buyer has a clear understanding of what contracts they may be held to.
Management and Employees – Understanding the structure and quality of the target company’s management and employee base is often important to assessing the company’s value. This can reveal any potential employee issues and help the buyer understand which employees should remain after the M&A transaction.
Legal Liabilities – As part of the due diligence process, it’s important to know whether or not the M&A transaction would include any legal liabilities. An attorney will go over any pending or potential litigation, arbitration or regulatory proceedings that the target company may be involved in.
Regulatory and Compliance – In any M&A transaction, there is a potential for regulatory and compliance issues regarding the target company and the transaction itself. Especially for larger deals, lawyers will assess the antitrust implications of the transaction.