The basic legal principle underlying a company purchase is caveat emptor (buyer beware). In other words, once the buyer has bought the business, it cannot complain afterwards. The vast majority of buyers are therefore keen to find out everything they possibly can about their target business before paying the purchase price.
“Assume nothing, Believe nobody and Check everything” is the mantra every business should adopt before cross-border acquisition.
Don’t rely on the target’s balance sheet only – you must work with local consultants from day one of the planning process. Whether natives or long-term expats, it is essential that you take advice from in-market professionals. They will help you avoid pitfalls. Cross-border acquisition requires special preparations and careful due diligence process.
Due diligence typically breaks into three principle categories.
A. Financial due diligence
– usually carried out by accountants; this is one of the most important elements of the buyer’s due diligence and include a detailed examination of past trading performance, future forecasts, accuracy of reporting systems, assets and working capital. Sellers should expect to be faced with many requests regarding financial and accounting information.
B. Legal due diligence
– usually carried out by lawyers; this aspect focuses on matters such as legal structure and ownership, contractual terms, loans and bank security, property matters, employees, intellectual property and environmental compliance. Whereas typically the buyer’s accountants might spend some time on site at the commencement of the financial due diligence, the legal due diligence tends to be carried out remotely. The buyer’s lawyers submit a due diligence questionnaire requesting information and copies of relevant documents. Then it is sent on to the buyer’s lawyers who then prepare a due diligence report to the buyer.
C. Tax due diligence
– sometimes included as part of the financial due diligence, the buyer typically wants to understand whether all taxes have been paid and what is the risk that the tax authorities may challenge the company’s results.
The results of the due diligence process is the basis for the buyer to take the final decision on the purchase.
Here are some tips for carrying out a successful due diligence:
- Get the right team around you
You can't do it all on our own; you need help in preparing your plan of action, but you also need to make sure you get the right help. Many due diligence processes fail to get to the bottom of the situation because they have the wrong team in place. So take the necessary time to evaluate the team that you need and then hire the best people you can, including the appropriate and experienced lawyers and accountants.
The first step typically is determining how big the target company is and what needs to be checked. Usually, it is necessary to carry out both legal due diligence which is vital for checking the legal issues as well as financial due diligence which is vital for establishing the value of the business. It is important that legal and accounting information is shared between lawyers and accountant. Some problems can be spotted only if you look at them from different perspectives.
- Be prepared to ask difficult questions
The main goal of a thorough due diligence process is to prevent surprises after the deal is done. There is a tendency for a careless due diligence among executives who know each other well. Executives who know each other well are more likely to rely on the representations and warranties given by the seller. The lawyers must be tough on this point because nothing can be assumed. You must be ready to ask difficult questions to the seller and get all the answers.
Get extensive documentation from the seller
Typically, the first problem lawyers face when they start the due diligence examination is the lack of comprehensive data from the seller. The sellers often do not want to disclose too much information in order to avoid additional questions from buyers. Sometimes it is a part of the sellers’ tactics, and at other times it may be an attempt to hide problems. Lawyers must be tough on this point because collecting all documents is of paramount importance. Lawyers must be sure that they have comprehensive information about the target company and so they can fully analyse the situation from a legal and tax point of view. There is no "one size fits all" solution and lawyers must adopt a very flexible approach.
Be prepared to carry out an extra investigation if required
Lawyers should be responsible for collecting all relevant information from various fields and comparing the results. Sometimes, only the comparison of the financial data against the legal issues can give a signal that there is a problem. If the need arises to continue investigation in order to establish the material facts, you should be prepared go an extra mile and do the additional research.
Keep it confidential
Keep the information about the project confidential. Get yourself a new email address for communicating with your advisors if necessary. Think of using code names because the risk of disclosing sensitive information such as the name of the target firm and your plans is really high and it can ruin the whole process.
The results of the due diligence process is the basis for the buyer to take the final decision on the purchase. The most important part of making a deal successful is carrying out a successful due diligence and getting to the bottom of the situation.
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