Conduct Due Diligence for Corporate Merging

Why You Should Conduct Due Diligence for Corporate Merging or Acquisition of Another Company?

Indianapolis Private Investigator, Lauth Investigations can assist companies with the merger and acquisition due diligence process.

Just like you would do a background check on a potential employee, it is also important to do a comprehensive due diligence check on another company that you are considering merging or acquiring. While a business deal may seem lucrative and advantageous on the surface, complex and devastating problems could be lurking below the surface. By determining a potential company’s background and assets, you will be preventing business disasters by determining the factual background of a company as well as lowering the risk of crime within the business.

While Michael Sisco may be describing due diligence as related to technology, he still has several key concepts that every business may consider which follow as:

  • Stability
  • Financial cost trends
  • Individual “flight risks”
  • Business continuity issues
  • Key players (2)

What exactly is involved in the due diligence process? First of all, a confidentiality agreement is requested from the seller by the buyer. This is basically an agreement to gain the knowledge about EVERY aspect of the business before you make an agreement with the seller. If you do not make an offer in the end, this agreement ensures you will keep all information confidential. The following is a list of items that are typical in a confidentiality agreement:

  • Financials–3 years of financials is typical
  • Employees–title, wage, duties
  • Vendors—relationship with company
  • Inventory
  • Equipment
  • Furniture and fixtures
  • Debts—It is vital you understand if you are acquiring any debt, and if so, how much

Due diligence also involves a review period, which can be agreed upon, and three critical issues are explored during this time period. Legal due diligence is important to determine if the seller has the title to sell the company which is essential if the seller is part of a franchise. The financial due diligence portion can determine if there are hidden assets or financial issues that need to be addressed. Commercial due diligence will determine the competition of the business as well as how the market views the business. If everything goes well and you decide to buy the business, consult someone to write a buy/sell agreement. (3)

Other key ideas to keep in mind: “Capital—If you have leftover capital, use it wisely, and don’t overspend. Employees—Review all employees again. Fire the ones that have red flags or hire new ones if they current employees are doing their job. Inventory and Equipment—Be frugal. Upgrade instead of buy brand new equipment.”

Keep in mind to not rely on verbal statements. Stick to the confidentiality agreement. If the seller is not divulging all information, there is probably a (shady) reason so look into a new seller. Do not try to conduct due diligence on your own, and do not neglect the due diligence process. It could end in disaster. (3)

The lack of due diligence can have significant unforeseen financial consequences. For example, the Victorian Funds Management Corporation lost $500 million dollars due to lack of due diligence and relied only on Google searches. Their choice in pursuing death funds by Life Settlements Whole Funds turned out to be a financial disaster. Instead of taking the time to properly check out the deal and listen to regulators who cautioned against it, they went through with the merger. If they would have performed due diligence, they would not have been discredited or have suffered such a substantial financial setback. (4)

Remember, when you merge with another company or acquire their company, THEIR problems become YOUR problems. These problems can be as minor as inflated labor costs or as disastrous as embezzling corporate funding. The solution to this potential risk is to ensure you conduct proper due diligence before you partner with another company. You wouldn’t want their mistakes to become the failure of your company. The positive aspect is that by acquiring or merging with another company can lead to more success for your business if the background check is conducted properly.

About the Author: Kym L. Pasqualini is founder of the Nation’s Missing Children Organization in 1994 and the National Center for Missing Adults in 2000. Kym is an expert in the field of missing persons and continues to advocate for crime victims utilizing 20 years’ experience working with government officials, law enforcement, advocates, private investigators, and national media.

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