On its face, a business acquisition seems relatively straightforward. One business essentially decides to buy another for the purpose of expanding its business operations and/or reducing costs. Yet, the process can be much more challenging.
There are a number of acquisition terms that must be negotiated, and the parties should only agree to them when they know that those terms are favorable to their position. This is why due diligence is critical.
What is due diligence? Due diligence is essentially an audit of the business being acquired to ensure that all facts pertaining to it are fully understood before agreeing to anything. This process always includes a review of a selling business’s financial records, but it can also work the other way where a seller assesses a potential buyer’s ability to actually acquire the business.
Assessing the finances of a business is no easy task, either. To start, the business’s total value needs to be determined. This requires a thorough assessment of inventory and other assets, as well as debts and liabilities, but it can also include a close analysis of a business’s location and consumer base. Next, a business’s profits and revenues need to be looked at and compared to outstanding debts and projected income. Then, it’s wise to consider the business’s competition, which may or may not be in line with other short and long-term risks.
It is critically important that due diligence is conducted before entering into any kind of agreement. Those who fail to conduct due diligence all together, as well as those who conduct it haphazardly, can find themselves entering into agreements that are detrimental to their best interests. This can lead to devastating financial consequences as well as litigation. This is why it is usually of critical importance to work closely with a business law professional before engaging in the acquisition process.