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The importance of due diligence during mergers and acquisitions

Purchasing or combining facilities with another business can be very effective growth strategies. Organic company growth can be frustratingly slow, but a large business transaction like a merger or acquisition could lead to major changes for an organization.

Executives contemplating mergers and acquisitions can rapidly expand their pools of staff, access intellectual property owned by another business and acquire popular brands through a business transaction. A merger or acquisition can be beneficial for both companies but can also lead to operational challenges and organizational liability. Due diligence is, therefore, crucial for the protection of one business seeking to acquire or merge with another.

What due diligence might uncover

The purpose of due diligence is to discover information about a company or  a proposed transaction that might not be readily available upon a cursory review. For example, someone seeking to sell a business might not disclose that there have been protracted conflicts between workers and management that could lead to a strike or a lawsuit. Companies may overvalue their facilities and equipment. They may fail to report information about product defects or complaints by clients.

Issues that could lead to litigation, including defective product claims or employee harassment allegations, could impact the business planning the merger or acquisition. It is crucial to know what liabilities a company has and what legal issues it could potentially face in the immediate future.

The due diligence process is crucial when planning for any large business transaction, especially a purchase with so many different variables. Properly preparing for a sizable business transaction can help reduce the risk inherent in a merger or acquisition.