Selling Your Business – Practical Tips for Sellers – Part 5: Due Diligence

This post was jointly written by Jennifer Wilson and Casey W. Riggs.

This is the fifth in a series of posts discussing the sale of a business from the seller’s perspective. In the first four posts, we provided an introduction to this series and discussed asset versus stock sales, seller financing, earn-outs, and letters of intent. In this fifth post, we’ll discuss the beginning of the deal process (after signing of the LOI), which typically begins with a comprehensive review of the seller’s business by the buyer (generally referred to by those in the M&A industry as simply “due diligence”).[1] [Read more...]

Drafting Nondisclosure Agreements in the M&A Context: Consider What Will Happen When the Deal Goes South

Let’s say you’re buying a business. As a condition to receiving more information, you are required to sign a nondisclosure agreement that contains all of the usual blather. You then start to sift through the mountains of information provided (and have your accountants and lawyers do the same, at considerable expense) to decide whether the company is worth purchasing, and on what terms. You like what you see, so you negotiate a letter of intent, and continue your due diligence investigation. You spend five or six months in negotiations and due diligence to the tune of many thousands of dollars (or more). [Read more...]

Looking to Invest? How to Determine Whether an Investment Is Worth It

This article was originally posted on business.com on May 1, 2012.

Investing in a new venture can be exciting. In addition to the potential to make a profit, many people invest in start-ups for the thrill of being involved with helping a fledgling company make its mark. The possibility of funding a breakthrough company is enough to get many investors enticed, committed, and involved.

However, it’s also a fact of life that many, if not most, start-up companies fail. Alongside that, some investment opportunities are fraudulent, being promoted by people only looking to swindle you out of your money and then move on to pursue other ventures (and victims). [Read more...]

Due Diligence for Buying a Business 101 – Part 4: Operational Due Diligence

Previously, I wrote about the need for the purchaser of a business to conduct due diligence on its prospective acquisition target.  As I discussed, due diligence on a business can be split into three sections: legal, financial, and operational.  This post will explore what is involved with the operational portion of due diligence.

The operational portion of due diligence involves ensuring that the business will be able to function as the purchaser expects after it has been acquired.  The business, in the hands of the seller, may be generating a handsome profit; however, upon transfer that profitability may be impaired due to a whole host of reasons.  Key employees may quit or key contracts may be non-assignable and thus end up being terminated upon the sale of the business, or worse yet, may even go into default. This is especially true in the context of leases and existing indebtedness.  Leases and loan documents often prohibit the transfer of the agreement, even indirectly through a stock purchase.  In addition, if applicable, the buyer will also need to make an inquiry into the ownership of the IP of the company, including the company’s trade names. [Read more...]

Due Diligence for Buying a Business 101 – Part 3: Financial Due Diligence

Previously, I wrote about the need for the purchaser of a business to do due diligence on its prospective acquisition target.  As I discussed, due diligence on a business can be split into three sections: legal, financial, and operational.  This post will explore what is involved with the financial portion of due diligence.

The financial portion of due diligence involves ensuring (a) that the financial information used to make the decision to buy the business and to determine the purchase price is accurate; (b) that the buyer has a thorough understanding of the target company’s finances so that it can include future potential contingencies in its projections and financial models; (c) that there are no customer collection or cash flow issues; and (d) that the buyer has a full understanding as to any future unfunded liabilities like pension benefits for current and future retirees and promised bonuses to employees.  Financial due diligence differs from legal due diligence in that it may require a larger team to conduct.  For legal due diligence, the buyer and its attorney(s) are usually the only necessary parties.  Depending on the sophistication of the buyer and the size of the deal, it may be necessary to hire accountants or other financial advisers to assist with the financial portion of due diligence. [Read more...]