A Business-First Approach To The Practice Of Law

4 red flags when doing due diligence for an acquisition

On Behalf of | Aug 11, 2023 | Business Law |

Whether buying real estate or making investments, it is vital to do due diligence. During this step, buyers could determine if their purchase is a sound investment. It could also apply to business mergers and acquisitions.

When expediting these significant business transactions, the parties involved could only make careful decisions after analyzing essential details about the business. Some information might stand out while doing due diligence. They could be potential red flags impacting the business’ future, such as the following details:

  • Sales figures: These numbers could go up or down, depending on how the business operates. However, long-term projections could indicate a significant decline in revenue, possibly signifying a fundamental issue within the company. Intervention might address this problem, but it could be risky, especially if no one knows what is causing the decline.
  • Sales pitch: Businesses typically craft presentations to pitch the business to potential sellers. Most of the details in these sessions include primary information and projections. However, it might be off-putting when the presenter implies urgency. Usually, these transactions take time. Further inspection may be necessary if the seller presses potential buyers to close the deal.
  • Tax discrepancies: Tax documents could reveal a lot about a business. Discrepancies or inconsistencies might require further review before proceeding with the acquisition.
  • Reputation issues and history: Aside from figures, responsible buyers should look at the business history as a brand. They might have notable actions in the past, potentially leading to legal concerns in the future. Ideally, the business can move forward and change after finalizing the acquisition. However, their issues could become unnecessary baggage, burdening the company after the integration.

These issues could have valid reasons, depending on the circumstances. However, it is best to inquire about them sooner than argue about them months or years after closing the acquisition.

Due diligence is necessary

It might take much work, but due diligence is critical to a successful acquisition. Aside from spotting any red flags, it could help pinpoint potential strengths and weaknesses that can guide the business forward. This information could also help make legal safeguards during the acquisition and later when implementing integration plans.

Founding Partners Damaso W. Saavedra and Allyson D. Goodwin