Acquiring a California business – whether by purchase, merger, or the exchange of credit, debt, or stock – can often be a complicated endeavor with significant risks involved for the acquiring company. Luckily, the acquiring company can effectively mitigate these risks by, for instance, fully evaluating the acquisition, conducting thorough due diligence of other potential acquisitions,
effectively negotiating the terms and conditions of the acquisition so as to best meet your company’s needs, and ensuring that these terms are carefully and adequately addressed in the relevant acquisition contracts. A skilled California corporate attorney can guide you and your business through every step of this process.
Due Diligence
Due diligence is the process by which a buyer or seller performs a comprehensive appraisal of a business asset before following through with the transaction. On the buyer’s end, for example, this thorough investigation will examine the assets and liabilities of the asset to be purchased, as well as determine the asset’s commercial potential. Due diligence investigations typically focus on specific areas of inquiry, such as strategic positioning, financial data analysis, operational asset valuation, and a host of legal matters.
Due diligence is a legal obligation. It stems from the corporate directors’ and officers’ duty of care, which requires them to perform their functions in good faith, in a manner that he or she believes to be in the best interests of the company, and with ordinary care and prudence. If a corporate director or officer breaches this duty of care, and if shareholders’ financial interests are impaired as a result, the shareholders can sue these directors and officers for damages. Thus, in mergers or acquisitions, especially those in which significant corporate assets are at stake, directors and officers must satisfy their duty of care by taking reasonable precautions to investigate the acquisition and ensure that the transaction is in the best interests of the company. A due diligence investigation is more than a legal obligation, however. It also provides practical protections during the acquisition process – simple problems can be discovered, and effectively remedied, early on in the transaction before significant problems develop. As a result, due diligence, while sometimes tedious, can save companies from wasting valuable time and money on an acquisition that may not be ideal.
It is important to keep in mind that due diligence investigations must be verified and corroborated by more than one test. In the late 1990s, venture capital flowed freely to internet startup companies shortly before the dot-com bust, and many of these venture capital firms relied solely on an EBITDA report (earnings before interest, taxes, depreciation, and amortization) without corroborating the company’s financial health. Cash flow analyses, accounting investigations, and tax reports must all be used to corroborate the status of a target company’s financial health.
Experienced Legal Representation to Protect Your Business Acquisition
Acquiring a business is a complicated process with many potential risks. The skilled corporate attorneys at Structure Law Group will work with you and your business to find a suitable asset, identify all potential areas of risk, and mitigate those risks effectively throughout the acquisition process. Call (408) 441-7555 today, or email admin@startupcompanycounsel.com to schedule your consultation with an experienced California corporate attorney.
