Lack of Due Diligence During a Business Acquisition | Allen Barron, Inc.

What risks are associated with a lack of due diligence during a business acquisition, asset purchase, stock purchase, or merger? How can due diligence make or break the success of any mergers and acquisitions transaction? Due diligence is so much less “attractive” than the deal-making portion of the transaction, and yet this is where the genuine profit, financial risk, and likelihood of success are locked into the transaction.

What is due diligence? Due diligence usually involves substantial checklists and informational reviews associated with the targeted acquisition’s books, operations, intellectual property, key employees, customers, or business transactions. Due diligence also encompasses the investigation and evaluation of existing and future market positioning and value. Due diligence rises out of the legal fiduciary duty of care any executive, manager, or Director owes to a corporation and, as such, should be taken quite seriously. In essence, due diligence comes down to establishing a process to do your homework and think things through from start to finish before any merger or acquisition.

Due diligence doesn’t wait for the completion of the Letter of Intent or transactional details. Data collection and analysis should begin when you first consider an acquisition and continue through the closing of escrow. While access to some information, such as the books and financial and accounting records, may not be available until after an initial agreement or preliminary understanding is achieved, all associated checklists, analysis, and review should completed before the final contract is signed.

The risks associated with a lack of due diligence during a business acquisition easily outweigh the associated costs. Look for a professional service partner with integrated legal, accounting, tax, and business advisory services. A business acquisition is almost always a substantial financial and business risk, and this will require expert insight from a variety of professional disciplines.

A detailed strategy includes checklists of information to be requested and reviewed, external verification sources, and, ultimately, the contacts for suppliers, key employees, customers, trade groups, and other market and industry experts. There are many factors that should be considered when determining the level of due diligence, including, but not limited to:

• The amount of money at risk/size of the transaction
• Reputation and prior experience with target company personnel
• Compatibility of corporate cultures, practices, and management strategies
• Time constraints and availability of resources
• The probability of reaching an accord
• The general risk associated with the target corporate entity, products, goods, and services related to the transaction

The lack of due diligence during a business acquisition is a primary reason for any merger or acquisition failure. Verification of key transactional facts and the ability to transfer ownership and associated goodwill are the essence of due diligence. It is essential to identify potential internal challenges, financial irregularities, and market issues as early as possible in any acquisition process. Your team of integrated professionals should work efficiently to identify any potential risks or areas of concern and provide options for mitigating or eliminating that risk while seeking an appropriate adjustment in the acquisition cost.

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