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Due diligence and business deals: Avoid these common mistakes

When it comes to business merger and acquisition deals, due diligence involves a deep dive into a target acquisition’s financial and legal standing. The seller will make all sorts of claims about the business in an attempt to get the best possible price. Due diligence is the buyer’s opportunity to dig into these claims and make sure they are an accurate reflection of the business.

When done well, due diligence helps to mitigate the risk of a bad investment. When done poorly, a bad acquisition can mean disaster for future business goals. One of the best ways to better ensure a good M&A deal is to avoid these three common mistakes.

#1: Failing to check into claims of ownership

The seller may claim the business owns the real estate where it operates or the building it does business. Check into these claims to make sure the land is not actually leased or otherwise owned by another entity. Discovery of a discrepancy may not kill the deal, but it could lead to additional negotiations. Remember, the whole point of due diligence is to make sure you get all applicable information and pay a reasonable price for the target business.

#2: Neglecting to look at the culture of the acquisition

Two different businesses are likely to have two different business cultures. This is natural. Look into the culture of the business that you plan to purchase. This can include looking into leadership style and compensation structures as well as employee behaviors.

It is a good idea to come up with an integration plan if your goal is to merge the two. This can include putting together a team to develop strategic goals for the post-merger transition period as well as regular and honest communication.

#3: Using the wrong business entity for the transaction

Business entities are a powerful legal tool. Making sure to use them wisely is not always intuitive. When it comes to one business buying another, for example, business owners may think to sign their own name on the purchase documents. This can cause a problem, potentially leaving the business owner open to personal liability and loosing the benefit of liability protection that comes with business formation.

Business owners can help to better ensure this protection remains by using the business itself to purchase the other business. This generally involves naming the businesses on the documents. An attorney can provide further guidance on the best ways to achieve liability protection.

Bonus: Not taking legalities into account

There are many different rules and regulations that can come into play. Some legalities are fairly broad, like making sure the business does not have any pending lawsuits, while others are more specific, like making sure a target acquisition that operates within the healthcare marketplace is in compliance with regulations like the False Claims Act. It is important to make sure the deal complies with state and federal regulations.