Business Acquisitions: How Much Due Diligence Is Enough?
Over the past several decades we have assisted our clients with literally hundreds of business transactions as part of our mergers and acquisitions legal services.
Business acquisitions have been more numerous than dispositions, perhaps because we have been fortunate enough to help many serial acquirers buy a business.
Certainly asset purchases have been more common than stock purchases.
These hundreds of business acquisitions have involved businesses in a wide range of industries including real estate and agriculture.
These acquisitions have ranged from modest-sized acquisitions of moribund businesses to very substantial transactions involving the acquisition of successful and sometimes sprawling businesses.
Acquisition Due Diligence should be tailored to the needs of the transaction
Once our client enters a letter of intent to a business acquisition, we are inevitably faced with the question of how to approach the due diligence review of the target business. While we have lengthy forms that list subject matters to be considered in a due diligence review, performing a due diligence review of business to be acquired is by no means a "one size fits all" proposition.
Different considerations will be important depending upon the nature of the business to be acquired, its structure, and the terms of the contemplated acquisition. Different levels of due diligence review will be warranted depending upon the magnitude of the contemplated acquisition, which might well determine the budget for the due diligence review process.
For example, I have heard of transactions where over $1,000,000 is spent on the due diligence review alone. Other transactions carry a far smaller due diligence budget!
Focus on key operational issues in due diligence
At the end of the day, for the buyer, it comes down to what to you need to know about the target business before you close the transaction? What really matters? Yes, there are many basic subject matters to be covered in virtually every business acquisition, but what else really matters about this particular business?
Over the past 30 years we have developed a tested sense of what each business transaction calls for, what is warranted and cost justified, and what amounts to going overboard in connection with each transaction.
Legal counsel should be involved in conducting acquisition due diligence
Over the years, a few strong-headed clients have insisting on handling all of the acquisition due diligence themselves, or with the wrong advisors, sometimes at their own peril.
I remember one buyer who neglected to investigate the one major customer of the business he was buying. He discovered after he closed the acquisition that this one major customer had given notice that it would no longer be a customer, leaving the buyer with a problem.
That same buyer also neglected to investigate the one major supplier of a business he was buying. The buyer found out afterwards that a major supplier was putting through a large price increase. Again the buyer was left with a problem.
These issues could have been easily avoided.
Another client neglected to perform adequate accounting due diligence pre-closing and found out after he closed the acquisition that he was owed substantial moneys. But the seller had no plans to pay the amounts due. Another lawsuit, but also another problem.
This problem could also have been easily avoided with some basic due diligence.
At the end of the day, a business buyer is well advised to perform adequate due diligence both about the business he or she is buying and any particular aspects of that business. A business buyer who fails to perform a modicum of due diligence is asking for problems after the fact and opening himself or herself up to real liabilities going forward.
Acquisition due diligence is best performed by professionals with decades of experience.
What due diligence to perform and how best to perform it are decisions best left to a professional with decades of business transactions experience and related due diligence reviews to his or her credit.
Determining how much due diligence is enough in connection with a business transaction is something that requires real judgment gained only by assisting clients with literally hundreds of business acquisitions.
The Calkins Law Firm, Ltd. delivers unsurpassed professional business law services for our clients. For more information, contact us.