The acquisition of another company can help a thriving business perform even better. Business acquisitions give companies access to new resources, such as specific commercial facilities and intellectual property. They can also help the acquiring business establish a larger market share.
In theory, acquisitions have the potential to help companies grow rapidly. However, plenty can go wrong during a major business transaction. The deal could fall apart at the last moment, putting the countless hours of work invested thus far to waste. The acquisition may go through, only to cause major operational challenges for the acquiring business.
Due diligence, or the research necessary before a large transaction, can help organizations limit their exposure during an acquisition. What makes pre-transaction research so important?
The risk of liability
When one business buys another, the acquiring company typically becomes liable for the financial obligations of the other organization. The acquiring business may also be vulnerable if outside parties have grounds to take legal action against the business.
The release of defective products by the acquired company, for example, could lead to lawsuits brought by consumers after the sale. Issues with how the company treated workers could also potentially lead to costly litigation. Thorough due diligence research can limit the likelihood of the acquiring business taking on a substantial amount of legal and financial liability.
The possibility of overpaying
Business owners listing their companies for sale often highlight the best aspects of the company while downplaying any issues. In some cases, they may provide inaccurate or incomplete financial information.
A thorough review of financial records could bring discrepancies to light or could show that the organization is currently overvalued based on projected sales, ongoing financial liability and other factors. Businesses that rush through the acquisition process may vastly overpay for the company that they intend to purchase.
Those attempting to balance the demands of business acquisition with ongoing company operations may find that it can be very challenging. Partnering with an attorney can help business owners and executives evaluate outside organizations before an acquisition. By retaining support for the research required during the due diligence stage of a transaction, the acquiring business can limit its exposure and the risk of complications after it is complete.