Willcox, Buyck & Williams, PA Blog

Sunday, April 30, 2017

Due Diligence Checklist for M&As - Have You Checked All Boxes?

Due diligence is integral to the success of any M&A transaction. It is performed to validate the valuation of a target company and to reveal risks that may complicate the transaction or the integration of the two companies. If an M&A transaction is carried out without comprehensive due diligence, the buyer will likely overpay, absorb significant risks or have problems integrating the two companies. These could cost the buying company millions of dollars. Always have an experienced South Carolina mergers and acquisitions lawyer perform due diligence on all your company’s M&A transactions.

Checklist for M&A Transactions – Where Attorneys Start

All M&A due diligence investigations cover three segments of the target company’s business: operations, finance and legal. The following are the legal boxes every due diligence investigation has to check:

  1. Corporate Structure

    M&A attorneys should start by assessing the target company’s corporate structure. Look at the company’s corporate records from the date of incorporation to the present day. Also evaluate important documents such as incorporation certificates, shareholder documents, security holder documents, stock option agreements, voting agreements, sale agreements, warranties and restructuring or recapitalization agreements. These documents can reveal operational risks or agreements that are inconsistent with the buyer’s long-term plan. 
  2. Financial Records

    Attorneys should review the company’s financial records, usually for the last five years. These include income statements, cash flow statements and balance sheets. They also include audit reports, management reports, letters to shareholders and budget projections. Are these consistent with the representations made to the buyer before the transaction? 

    Look out for financial liabilities. Does the company have debts and operational credit agreements? What about contingent liabilities? If these are present, attorneys will have to review them to determine whether they can harm the buyer’s financial position in future, whether the target company is financially sound and whether it has been adequately valued. 

    Tax records are another important place to look. Look at the target’s tax returns for the last three years. Important documents include federal and state tax returns, correspondence with federal or state tax agencies, government audit reports, IRS settlement documents and transfer pricing agreements. 

  3. Contracts 

    Attorneys must review all material contracts by the target company. These include contracts with customers, suppliers, distributors, guarantors, lenders, joint venture partners and employees. These will reveal any deal breakers such as non-compete clauses, non-transferable business contracts, unfavorable change of control provisions and limiting contractual restrictions. These will not only pose a risk to the buyer’s business but also diminish the value of the target company.

    Other important contracts to look at are franchising agreements, license agreements and settlement agreements.
  4. Compliance 

    Attorneys need to confirm the target company complies with federal and state regulations. This usually involves an assessment of antitrust issues associated with the proposed M&A transaction. 

Due diligence investigations involve disclosing a lot of vital information, information that could be used by the either the buyer or target’s competition should the M&A deal not go through. This is why it is absolutely critical that all M&A negotiations begin with the signing of a non-disclosure agreement to protect both parties from malicious acts. 
Every merger and acquisition is different and has its unique due diligence demands. Talk to an experienced South Carolina M&A attorney for legal solutions tailored for your M&A deal. Contact the M&A attorneys at Willcox, Buyck & Williams today to discuss your deal.


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