M&A 101: Due Diligence (Part 2)

Due Diligence ChecklistAcquiring another business or merging with another company can be a risky undertaking. The unknowns of the target company can undermine a deal, or create unforeseen trouble once the purchase is complete. Conducting due diligence – a systematic examination and evaluation of assets and liabilities – can help head off problems before they begin.

In part one of this series we took a look at ways to assess a target company’s assets. This installment looks at intangibles such as legal issues, corporate culture and goodwill.

Once you have examined the quality and value of a target company’s assets, you’ll want to review and assess other key factors. In particular, if your company is acquiring or merging with a legal entity and assuming all of its related liabilities, you need to conduct a due diligence search so that you are aware of all such liabilities. You may also wish to examine the target company’s operating results.

Here is a checklist of what to look for in terms of liabilities and operational issues:

Liabilities
• Conduct a Uniform Commercial Code (UCC) filing search and review of local court records to uncover any undisclosed loans secured by assets, outstanding liens and judgments against the company or its owners, undisclosed litigation, etc.
• Review tax returns and tax filing positions to identify questionable or overly aggressive tax positions that could lead to future assessments for unpaid taxes, penalties, and interest
• Review all contracts entered into by the target company to identify undisclosed (or unknown) liabilities or obligations, and to uncover potentially unfavorable terms and deals that might negatively affect future operations or financial performance
• Examine employee benefit plans, including retirement and pension plans, to make sure they have been properly funded and to gain an understanding of future obligations you may be assuming upon purchase of the business

Operations
• Perform financial ratio analysis in several key areas to assess cash flow, profitability and overall financial health of the company, and similar key performance indicators in important departments or divisions
• Assess the financial health of the company’s major customers and suppliers
• Interview important customers and suppliers for their perspective on the target company’s operations
• Conduct an internet search of the company and its owners and officers to determine if there is potentially embarrassing information or legal liabilities that could come to light in the future
• Assess the company’s corporate culture and determine what will be required to integrate it into your organization
• Obtain an organizational chart of officers, managers, and employees and a biographic sketch of key personnel
• Interview key managers to get their opinions and assessment of company operations, performance, and possible improvements
• Determine which key personnel will remain following the acquisition and which will need to be replaced

This is just a basic list of due diligence questions and investigations that can assist you in your evaluation of a potential merger or acquisition candidate. These procedures should be modified based on the nature of the business and industry. Gray, Gray & Gray’s Merger & Acquisition Group can help you set up due diligence procedures that are specific to your needs. Please contact us at (781) 407-0300.

 

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