When acquiring a business, the focus tends to be on consummating the deal and securing future business prospects, but what occurs before the acquisition is just as important as what happens afterward. If you are the buyer, you should make sure that the seller is not leaving you with unknown liabilities for pre-acquisition events.
No matter if the transaction is structured as an asset or stock deal, part of a thorough due diligence process includes the following steps, along with many others:
• Gather all contract documents of the target company and have your legal counsel review them
• Confirm that each contract the buyer desires to assume post-closing is in full force and effect and is valid, binding, enforceable and assignable, and understand the applicable terms and conditions for material purchase orders
• Ensure that the seller is not involved in any pending litigation and that no event or circumstance has occurred that may lead the seller to expect future claims against it
• Ensure that there are no known facts to the seller that will materially threaten the assets, business, prospects, financial condition or results of operations of the target company
• Review all documents relating to intellectual property to understand what your rights will be to these assets, including the purchase order terms and conditions
• Investigate for evidence that any of the inventory on hand or to be produced by the target company after acquisition is or will be defective
In addition to a thorough due diligence process, you will want to add as many protections in the acquisition agreement as the negotiation will allow, such as customized representations and warranties that address high-risk areas of the target, clear and broad indemnification provisions that allow for post-acquisition claims against the seller and a hold back of a portion of the purchase price in escrow to cover claims.
Using experienced legal counsel to guide you through the pre-acquisition process will allow you to be proactive rather than reactive. Otherwise, you might find yourself with a tangled web of poorly written contracts from which it is difficult, and costly, to extricate yourself.