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Acquiring a new company? 'Buyer beware' and adopt due diligence

So, you have decided to acquire a business or a company. The general principle governing acquisitions of businesses and companies is 'buyer beware'. 

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In other words, you could acquire a business or company and then discover it is not what you thought it was.

So, how do you protect yourself?

By conducting a due diligence enquiry, you should be able to obtain sufficient information about the target business to enable you to decide whether the proposed acquisition represents a sound commercial investment. Here are our top tips:

Selection and management of your acquisition team

When acquiring a business, you will need to call on the services of legal, commercial and financial advisers, as well as your own personnel. The key to a successful due diligence review is good communication between your advisers. This can be achieved by appointing one adviser to coordinate and project manage the whole exercise. You should also request a letter of engagement from each adviser setting out the scope of their review. This will help to avoid duplication of effort, establish how information will be disseminated between your team and help you budget for fees.

Harness your own knowledge

It is likely that you will already know a lot about the business or company you want to acquire. Meet with your acquisition team at an early stage to pass this information on, and, in particular, identify any areas of concern you may have.

Legal due diligence

Your legal adviser will help to establish crucial facts about the target business or company including: whether the seller has good title to the assets of the target business or the shares in the target company and that in turn the target company has good title to its assets; and the identity and level of the target company's liabilities (these will be looked at in conjunction with your accountant)

Commercial due diligence

Consider how to control and reduce risks in the target business or company by asking your commercial adviser to report on the market in which the target business or company operates. Consider competitors, the target's strengths and weaknesses and its track record for production, sales and marketing and research and development.

Financial due diligence

Consider the financial risks and opportunities of the deal to determine whether they complement your current business strategy by asking your accountant to prepare a report on the financial aspects of the target business or company.

Sector knowledge

If your target business or company operates in a specialist or highly regulated industry sector (for example, transport, financial services or utilities), you should ask your advisers to consider this as part of their review so as to ensure that it has complied with all necessary legislation and regulations.

Interim reports

Ask your advisers to report to you on a regular basis, with the focus being on key issues which might jeopardise the deal or require negotiation.

Bargain

Once the due diligence review is complete and the information has been assimilated into reports by your advisers you will be able to make an informed decision as to whether to proceed with the acquisition and, if so, on what terms. The results of the review may be useful as a bargaining tool to negotiate the price of the acquisition.

To read another interesting acrticle about buying personas – how they can help your marketing, click here.

About the author

This hot tip was prepared by Aaron & Partners LLP. For further help and assistance, contact Clare Gray in the Company Commercial team on 01565 626 001

Last updated 8th June 2016

 

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