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Mergers & Acquisitions: Do Your Due Diligence and Disclosure

In every mergers and acquisitions transaction, due diligence is a must. End of discussion. The purpose of due diligence is for the buyer to substantiate the seller’s financials, contacts, customers and all other relevant information. The buyer has to be assured enough that the deal goes through or ‘closes.’ One of the elements that makes  due diligence so important is that often times a buyer’s partner, bank, or equity firm who may be providing the financing have very strict requirements for a transaction. They are more exacting  and they have to be satisfied. They are like oil companies and will be drilling extensively for data. Usually due diligence begins with the signed letter of intent (LOI). That is when a seller needs to start gathering his or her information. If the seller anticipates a sale before that point, the data collection should start sooner as gathering all that information takes time. In many typical situations, due diligence usually takes a month but can stretch  out longer. This is the time the buyer must probe for material information so there are no post-closing issues or regrets Here is a just a brief overview of what due diligence entails: Financials: annual reports going back at least 3-5 years; projections; condition of the assets; budget, current liabilities; margins; working capital; debts. Intellectual Property: condition and status or trademarks, patents and copyrights. Customers: Number and nature of the target company’s clientele base; top 10 or 20 customers; customer retention. Sales and Marketing: Sales terms and policies. Contacts and Obligations: A review of all the relevant contracts the target company has including loans and credit arrangements; client contracts; employment agreements and union contracts; restrictive agreements; real estate agreements; Synergies and Strategies: How well does the acquiring company mesh with the target company; itemize what each brings to the other; how do the companies and the culture compliment each other. Management Team: structure and organizational chart of the target company; top management bios; compensation; bonus agreements; employee manuals; employee files. Lawsuits: Is the target company involved in any current lawsuits or threatened litigation. Tax Issues: All federal and state tax returns filed for the last 3-5 years and related issues that may affect the target company. Insurance: All key insurance policies including general liability; Errors and Omissions; Health Insurance; Worker’s Compensation insurance, etc. This is certainly not an exhaustive list. Depending on the situation, due diligence can encompass a very broad range of issues. It is wise to discuss the due diligence process with experienced counsel so that nothing gets overlooked. R. D. Adair, PLLC offers experienced business counsel and can assist you with your  due diligence and disclosure issues. To learn more about due diligence and disclosure issues or how we can assist you, contact us today to schedule a consultation.


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