Purchasing a company or taking over a business can be one of the best decisions you can make. Mergers and acquisitions can be complex and it is essential to make sure that you prepare properly in advance. If you fail to manage issues associated with the merger, it could be disastrous for your business. One way to handle these matters is by using due diligence with an acquisition checklist. The checklist is an essential tool and is a necessary part of acquiring a business.
Understanding Due Diligence
Due diligence means taking the care necessary to prevent liability in a matter. Due diligence refers to conducting a reasonable investigation prior to a merger or acquisition. You must perform your due diligence before you make a major purchase such as a business. According to the Corporate Finance Institute, it is “the process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all relevant facts and financial information and to verify anything else that is brought up during an M&A deal or investment process.”
Parts of an Acquisition Checklist
An acquisition checklist must cover various areas. It should cover legal, financial, operational, and strategic matters to create a comprehensive overview. Together, these areas form a comprehensive review of a business before you make the final purchase decision.
Legal Matters
Review the corporate documents including the articles of incorporation and meeting minutes. Look at contracts such as those with suppliers, contractors, and customers. You will also want to evaluate intellectual property contracts. It is important to verify that the company is in compliance with federal, state, and local laws and regulations. Make sure you look at any litigation that is pending or situations that could result in future litigation.
Financial Issues
A major part of due diligence is to review all finances of the company. Look at the income statement, balance sheet, and cash flow statement to get a complete picture of the financial stability of the operation. Analyze revenue, including growth and revenue profitability trends. You will want to fully understand the company’s debt obligations and payment structures. It is critical to evaluate the business finances to identify potential risks. Finally, you must obtain a thorough company valuation based on all the many factors you review.
Operational Information
Complete an operational review of the business. You should understand the business model the company utilizes along with its market position. Look at how the company utilizes resources and the processes in place to manage the business. Review all phases of the supply chain. Delve into the human resources practices and procedures. Identify any weaknesses in the company’s operation that could impact the profitability of the business in the future. For example, if the company uses outdated technology, the new owner may need to fully update the IT systems.
Strategic Overview
Complete a thorough market evaluation of the company. Look at the company’s size and position among the competition. Learn about market trends. Once you understand the company’s current standing, you can develop a plan to help integrate the company through acquisition. This will give you a good idea of how you can merge the companies together in a way that will prioritize profitability.
A comprehensive checklist can be a strenuous process, but it is essential in order to ensure a smooth and profitable acquisition or merger. To find out more about mergers and acquisitions, contact our legal team at Moen Sheehan Meyer, Ltd. at (608) 784-8310 or online to request a consultation.