Disney buys Pixar – and then Marvel a few years later. Facebook acquires Instagram. And Google takes over Android.
These are just a handful of some of the business world’s savviest acquisitions – corporate purchases that can transform a company. With them, businesses can diversify their offerings, accelerate business growth and, potentially, reduce competition, depending on what company they acquire.
But there is much to do before a deal is ever signed. A successful purchase doesn’t happen without a very careful and deliberate acquisition due diligence.
What is Acquisition Due Diligence?
During due diligence for a company acquisition, purchasers vet companies to ensure there are no troublesome legal or financial issues that have yet to be disclosed.
It’s critical to the deal-making process for several reasons.
Due diligence allows companies to corroborate the information provided by the business that is being acquired. By doing the proper due diligence a purchaser of a company can identify any possible problems so they can avoid a potentially bad deal. And, finally, acquisition due diligence can help a company determine how much the deal is actually worth.
But proper due diligence takes time and effort, requiring a good legal team, comprehensive study of the deal as well as the business target itself. Here’s how to get it right.
The Dos of Due Diligence
Do take your time
Acquisition due diligence happens at the beginning of any discussion about a business purchase and can take two to six months on average to complete.
Do consider the fit
Some questions to consider:
- Will it save money in the long run because you are purchasing one of your company’s vendors or suppliers?
- Will it allow the company to expand into a new geographical region?
- Are both companies selling similar services or products, which can be sold together after an acquisition and boost sales?
- Will it give you the ability to use the other company’s trademarks, trade secrets, or patents, so you can improve your own products or services?
Do remain objective
It might be a tall order in the midst of the excitement about a potential deal, but it’s critical to be diligent during this process and not be afraid to walk away.
Be circumspect about the materials your target company provides. And be sure to approach other companies or advisers who have previously worked with the company so you can understand how it operates from every angle.
The Don’ts of Due Dilgence
Don’t rush it
Even if you’re competing with another business for the deal or the other company’s leaders are encouraging you to speed up the process. One misstep during due diligence can lead to a fatal acquisition. If this one doesn’t work out, there will always be another opportunity.
Don’t forget anything
Businesses completing acquisition due diligence must dive deep into its target’s background. That includes a full audit of its tax filings, financial statements, capital expenditures and investments and any debts, along with its forecasts for future revenue and potential growth.
But finances aren’t the only issues to place under the microscope. Due diligence also should include a comprehensive look at a company’s intellectual property (including trademarks and patents), contracts, as well as background on its executives and close inspection of any overseas locations.
Don’t start the acquisition due diligence process without an attorney
This one is self-explanatory. A business attorney who has experience with acquisitions will know what skeletons to look for and how to really ascertain if the deal is a good fit, as well as draft and negotiate the terms of the purchase agreement so you are fully protected.
Don’t forget about social media and business profiles
Acquisition due diligence often is focused on the big picture – a company’s financial details and liabilities. But it also should include attention to a business’ social media and business profiles.
What are customers saying about the company’s product or service online? How does the business rate on Yelp or other online profiles? A plunge online can sometimes uncover critical issues and flaws in a particular business that its own leaders might not even be aware of.
Risk comes with any business deal. But a comprehensive approach to acquisition due diligence can greatly reduce that risk and help to ensure a swift – and prosperous- business purchase.
We are not your average law firm. Think of us as the next step in your company’s growth. When you work with Gouchev Law, you can expect innovative solutions, adept business guidance, and aggressive advocacy to help you achieve your goals and protect you from risks. At Gouchev Law, we help companies of all sizes. Schedule a free strategy session today to see what Gouchev Law can do for your business.