Many business leaders engage in Mergers and Acquisitions (M&As) as a principal method to expand their business, boost their reputation among stakeholders, gain access to new product lines or new technology, lessen operational expenses, increase market share, profitability and help increase diversification in the market.
While a merger is a combination of two organizations, where one company gains more importance by diluting the ownership of the other company, an acquisition is where the acquiring company purchases some or all of another company’s shares or assets, and the acquired company ceases to have any interest or right after the acquisition.
Therefore, undoubtedly M&As play a significant role in a company’s lifespan and such transactions can have a lasting impact on acquired companies.
Unfortunately, many studies have proven that most M&A transactions have failed to accomplish their end goals which in turn undermines the value and time invested in such transactions in the first place. The purchaser is usually in a vulnerable position due to having insufficient knowledge of the company they are acquiring or merging with. Hence, the importance of due diligence, which is the process of thorough evaluation and investigation of all aspects of a prospective business. The benefit of carrying out a detailed legal due diligence process is that it helps the purchaser make informed decisions and adjust expectations of the company, which in turn ensures a smooth transition process.
When it comes to due diligence, every minute detail of the target company is crucial. The ultimate goal of due diligence is to ensure that there are no hidden drawbacks or traps in relation to the business transaction under consideration.
Typical Due Diligence Checklist that arises in M&A transactions
Due diligence considers various aspects of the business, including financial and legal issues, general information, ownership, legal issues, employees, environmental issues, intellectual property, assets, etc. It is always vital to have a thoroughly prepared due diligence checklist in place for an M&A transaction. Below are some of the pertinent aspects that need to be considered in an M&A which can also serve as a preparatory guide in such a transactions process.
- General Information
It is important to first understand how the business works and how it generates revenue. Thus, one should analyze the business structure and operations for this purpose. This includes a list of all the officers, directors, and shareholders of the Company and their respective roles, Articles of Incorporation, Corporate bylaws and any amendments, Certificate of Good Standing, list of subsidiaries and any other entities, list of all jurisdictions where the Company conducts business, business plans, etc.
- Financial information
This includes annual financial statements, balance sheets, documentation surrounding the capitalization of the company, current budgets, and projections, future financial projections, etc.
- Intellectual Property
This covers questions related to all patents, trademarks, tradenames, service marks, and copyrights owned or used by the Company, any associated search reports, and details of any liens or other restrictions and agreements in relation to the same.
- Legal issues
Since the buyer will be liable for any obligations, contingencies, and restrictions, it is important to understand the legal issues faced by the company. This should consist of a description of any pending or threatened litigation before any court or regulatory authority, settled litigations and terms of the settlement, loan agreements, bank financing agreements, and any lines of credit to which the company is a party. The bidder’s legal team must obtain an opinion letter from each attorney defending significant litigation to which the prospective company is a party.
- Environmental issues
Environmental issues that could directly affect the value and reputation of the company should also be considered namely listing of hazardous substances, any intentional or accidental spills/releases of the material, details on workplace safety and health programs, and relevant environmental permits and records obtained by the company.
- Employee Information
The buyer also needs to be aware of the employees and their roles in the prospective company. It is important for the buyer to understand all payroll information, HR policies, employee tax forms, retirement plan information, and insurance. The buyer should also take into account all employment contracts and agreements relating to all employees of the Company.