Why due diligence is important in an M&A transaction?

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Why due diligence is important in an M&A transaction?

Why is it important not to skip due diligence

I get a lot of clients who have problems after they bought a business. Unfortunately, many of the problems were avoidable, but the biggest mistake we have seen by buyers — particularly when the buyer bought the business without an attorney — is skipping the due diligence process.

The consequences of not conducting due diligence in M&A

The most common problems purchasers face when not conducting due diligence are the following:

Pay for a higher price

The purchaser realizes that they overpaid for the business because they did not consult an expert on the financial health of the business.

Unforeseen problems

The buyers find out issues that exist in the business after they spent the money buying the business and have little recourse. They might realize the financials of the company they bought do not have a good performance.

Liabilities

After the purchase, it is very common the buyers know that the company they bought has debts or other operating issues. Similarly, the buyer can learn later that they have more liability than previously believed because he did not review all the contracts.  Other times, the buyer did not check if the business had all of its certifications and licenses necessary to operate.

The buyer thinks she bought her dream, but instead it becomes clear she bought a nightmare. To add to this nightmare, sellers often move out of the state, or even the country, so it’s hard for the buyer to get the seller to contact the seller.

Also, due diligence is the basis of the purchase agreement. In these cases, the language in the purchase agreement did not adequately protect the buyer’s future.

Lastly, another reason is when the seller commits fraud upon the buyer and actually lies about certain aspects of the target business. As I explain here, if a seller commits fraud, the buyer will have a hard time convincing a court to help the buyer because the court does consider whether the buyer did what he could to prevent being in this unfortunate situation. Skipping due diligence will just give the court a reason to say “you would have caught this if you did due diligence.”

We know sometimes you want to get the deal done, but skipping due diligence will come back to haunt you.

M&A Due Diligence Services

The due diligence process is key in the M&A process. We assist with the commercial due diligence of your business acquisition and make sure you have a smooth sale. If you need our M&A advisory services, call at (630) 517 5529

 

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