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…]