Due diligence for buying a business is crucial to a successful transaction. Whether a deal is structured as a merger, stock transaction, or asset transaction, a prospective buyer of a business must perform due diligence to ensure that the buyer is getting the business the buyer is paying for in the transaction. Due diligence requires the seller to provide detailed information regarding the operations and finances of the company, as well as various other parts of the business. Many different types of due diligence should be conducted — and a potential buyer should look into these categories, depending on the industry and type of transaction:
Due Diligence for Buying a Business: Legal Due Diligence
Legal due diligence is a comprehensive investigation into a company’s legal affairs. A potential buyer should evaluate any potential risks, liabilities, and legal issues that could affect their ability to operate the business after the purchase. Legal due diligence encompasses examining a wide range of areas in depth, including:
- Contracts with customers, clients, and employees
- Verifying licenses and permits
- Assessing regulatory compliance
- Identifying any current or pending lawsuits
- Employment matters
Thorough legal due diligence can help a buyer understand all possible risks associated with a deal, so they can make an informed decision about the purchase.
Due Diligence for Buying a Business: Financial Due Diligence
Financial due diligence is a focal point in most transactions. Not only does Financial due diligence give a potential buyer important insight into the economic health of the company, but Financial due diligence can also uncover any “red flags” such as credit risks, financial inconsistencies, and unresolved tax issues. During the financial due diligence process, a buyer should:
- Review financial statements and balance sheets
- Assess the company’s cash flow
- Investigate financial liabilities
- Examine revenue streams
- Evaluate projections and capital expenditures
- Evaluate tax returns for completeness, and existence
By understanding the target company’s financial health, a prospective buyer can determine whether the targeted company is stable and a good investment.
Due Diligence for Buying a Business: Operational Due Diligence
Operational due diligence is a thorough look into the target company’s day-to-day operations. Operational due diligence helps a potential buyer identify operational risks and strengths. During this process, a buyer should:
- Review production, distribution, supply chain management, and other operational processes
- Assess the target company’s technology and systems
- Look for operational risks, such as reliance on a single supplier
- Review the company’s relationship with key customers and vendors
- Evaluate lists of suppliers and their terms
By conducting operational due diligence, the prospective buyer can determine any gaps and potential areas where development may be needed. The objective is to determine the sustainability of the target company’s operations into the future.
Due Diligence for Buying a Business: Human Resources due diligence
Another key component of due diligence is conducting a detailed review of the targeted company’s human resources and human resource processes. This detailed review can help the buyer identify any potential challenges regarding integration and ensure a smooth transition for employees. Human resources due diligence involves:
- Identifying key personnel and their roles
- Looking into the employee structure of the company
- Reviewing the company’s HR policies
- Assessing payroll, compensation, and employee benefits
- Understanding the company’s values and work culture
- Evaluating the adequacy and talent retention of the workforce
By conducting effective human resources due diligence, the purchasing company can avoid the potential loss of employees and reduce any risks that could arise due to the acquisition.
Intellectual Property Due Diligence
Intellectual property due diligence involves reviewing a company’s IP portfolio. This allows a potential buyer to assess the value, risks, and benefits of the company’s intellectual property. IP due diligence typically includes:
- Reviewing patents, copyrights, trademarks, and other intellectual property
- Assessing the enforceability of IP rights
- Evaluating the company’s IP policy and determining whether it is well managed
- Looking into the potential for IP-related litigation
- Reviewing trade secrets and confidentiality obligations
IP due diligence can also involve evaluating corporate names, domain names, publicity rights, written works, websites, online publications, social media, and any other brand assets. This process can help a potential buyer value the company’s IP assets, identify any infringement risks, determine how well-protected these assets are, and avoid costly litigation.
Contact an Experienced New York Business Attorney
Whether you are considering buying or selling a business, it’s vital to have a knowledgeable business attorney by your side who can guide you through the due diligence process. Providing dedicated representation and trusted counsel, Brinen & Associates advises clients regarding a broad scope of business matters. Call (212) 330-8151 or send us a message to learn more about how we can assist you.