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The importance of due diligence when acquiring an organization

On Behalf of | May 28, 2024 | Business law

Business acquisitions occur in a variety of different scenarios. Perhaps someone wants to purchase an existing business because they dream of becoming their own boss. Maybe a successful company hopes to expand and believes acquiring a competitor or a business in an adjacent industry is the best way of accomplishing that goal.

A business acquisition is a massive transaction that can have significant implications for the future success of both organizations. It is, therefore, crucial for those considering the acquisition of a company to very carefully and fastidiously perform their due diligence.

What makes the due diligence process so important for a business acquisition?

The potential transfer of liability

Someone who purchases a business becomes responsible for its contracts, its products and its employees. In theory, that might mean that the new owner is the one who has to deal with a lawsuit related to workplace discrimination or defective products. Someone selling an organization is unlikely to be forthcoming about issues that could compromise its final value. Therefore, those conducting business transactions often need assistance researching the company they intend to acquire by looking into employee matters and other concerns that could lead to legal liability.

The risk of overpaying

The bigger a transaction is, the more important setting a fair and reasonable price becomes. Overpaying for a company is a very easy mistake to make during the acquisition process. Factors ranging from insufficient disclosures to an inappropriate valuation model could lead to an unreasonably high price set for business. The depreciation of business resources, like machinery, the obligations an organization has to employees and even the prospects for a certain industry can influence its actual value. Those seeking to acquire a company typically need to do an independent valuation to ensure that the proposed price for the transaction is a reasonable reflection of the company’s worth.

Handling the due diligence process independently while simultaneously managing another company can be too much for the existing management team at a small business to handle alone. Partnering with an attorney can help those navigating large business transactions protect against various risks. Lawyers can assist with everything from negotiating contract terms to completing the due diligence process.