Critical in every M&A transaction is a comprehensive due diligence investigation. An acquirer/buyer should always have a complete understanding of the all the intricacies of the target company, from operations to financial to legal. Failure to conduct due diligence may lead to major unforeseen issues such as unknown liabilities or overpayment. A buyer should never rely solely on information that the target company has provided but should take the necessary steps to validate. It is important to have a M&A due diligence checklist to ensure that all major areas have been investigated and considered when making the decision to buy or not to buy a company.
Some of the key areas that should be included on a M&A due diligence checklist are discussed below.
When assessing whether to buy a target company, the buyer should always be privy to the target company’s financials including historical financial statements as well as projections for future performance. As numbers can be altered and mistakes can easily be made, the buyer should go a step further and verify whether the financial statements were audited and determine how long the financials were audited. The buyer should also understand what investments will need to be made to continue the growth of the business.
Very important in the due diligence process is the understanding of all material contracts of the target company. The buyer should make sure it reviews every contract of the target company such as employment agreements, intellectual property agreements, vendor agreements, indemnification agreements, and exclusivity agreements. It is highly important that the buyer know what contractual obligations they are walking into when acquiring the company.
The target company may have patents, trademarks, copyrights, or trade secrets. The buyer should be aware of all the intellectual property that will be transferred through the acquisition. The buyer should investigate whether the target company has taken the necessary steps in protecting the intellectual property and whether there are potential or pending infringement lawsuits. Just as important, the buyer should make sure the target company isn’t infringing on anyone else’s intellectual property rights.
Past, Pending, and Possible Litigation
Not only is important to be aware of potential infringement lawsuits, but also of all past, pending, or possible lawsuits that have been threatened. Understanding the adversarial climate of the target company should always be considered when purchasing the target company. If the target company has been threatened with a major lawsuit, it shouldn’t be looked over just because a lawsuit hasn’t been initiated. It should be taken very seriously and a complete understanding of the facts surrounding the threat should be investigated.
At the heart of a business, is its customers. Without customers a business cannot thrive and will ultimately fail. Therefore, it is important for a company to keep customers happy. Understanding the target company’s customer base is key in knowing how to successfully run the company and generate revenues. Therefore, it should be determined whether there will be issues in keeping customers after the target company is acquired.
The five areas discussed are in no way an exhaustive list of the areas that should be included on the M&A due diligence checklist. In fact, there are many more areas to consider including, but not limited to, insurance, regulatory issues, and tax concerns. However, the areas mentioned are a guide in understanding the importance of a due diligence checklist and a good place to start.