Mergers and Acquisitions Due Diligence: 5 Things to Know Before You Buy or Sell

Whether you’re thinking about buying a business or selling your own, there are a few key things every buyer and seller needs to think about and know before engaging in the mergers and acquisitions process. 

We all see the multi-billion-dollar M&As taking place on the global business stage, but what about when you want to sell your small- or medium-sized business?

Even if we’re dealing with smaller numbers, the buying and selling process is still serious. Make sure you pay attention to these 5 things before signing on the dotted line. 

When it comes to mergers and acquisitions, due diligence is non-negotiable

Yes, this entire post is about specific due diligence. But we would be overlooking the obvious if we didn’t start with the importance of paying close attention to every detail and verifying all information you share or receive. 

If you’re selling, you need to prioritize creating clean, accurate records and disclosing any pertinent information to the seller upfront. Don’t try to hide anything in the process––it will only come back to haunt you! 

If you’re buying, you need to examine everything with a fine-tooth comb. From financial statements to tax returns, legal liabilities, contracts, intellectual property, customer lists, and employee agreements, make sure you understand every aspect of the business you’re about to buy. 

Key information that’s revealed after the sale can result in expensive lawsuits and ruined deals. When buyers and sellers take the due diligence process seriously, both parties can avoid unwanted surprises. 

Assets or stocks?

The way you structure the sale or acquisition of a business has serious implications for the taxes, legal risks, and operational structure of the business after the sale. 

It’s important to make sure you choose the right type of sale based on the unique assets and performance of the business and the buyer’s and seller’s overall goals. 

In an asset sale, the buyer purchases individual assets from the business. This could be things like equipment, intellectual property, or customer information. This type of business sale means the buyer is not responsible for any past liabilities of the business. 

In a stock/entity sale, the buyer purchases the entire operational business, including its existing legal structure, debts, and obligations. This type of business sale means the buyer is responsible for any past liabilities. 

A successful sale requires the buyer and seller to agree on what is being sold and what the buyer is comfortable acquiring. The good news is that even if you have a business with serious liabilities that no one is interested in buying as is, you may be able to structure a profitable asset sale regardless. 

Decisions like this are the reason you want to have a trusted business attorney involved who can protect your best interests from the beginning of the buying or selling process. 

Mergers and acquisitions due diligence includes a valuation strategy, not just numbers

Buyers and sellers tend to be diametrically opposed. Buyers want to make as much money as possible and sellers want to pay as little as possible. 

But at the end of the day, both parties want to make sure they’re getting a solid, fair deal. 

An effective business valuation doesn’t just look at EBITDA multiples and set a price from those numbers alone. 

Whether you’re buying or selling, it’s your responsibility to make sure you understand the strategy behind the sales price. 

Things other than numbers to consider when valuing a business:

• Growth potential

• Industry trends

• Reliance of the business on the current owner 

• Strength of current management

• Overall culture 

• Employee satisfaction 

A business valuation goes far beyond the initial numbers, which is why you should always involve a neutral third-party broker’s input to avoid overpaying or undercharging. 

You also want to make sure you truly understand the value of what you’re buying or selling! 

A realistic price grounded in a comprehensive valuation strategy will lead to smooth negotiations and a successfully closed deal. 

How is the deal structured?

Before a sale can be finalized, it’s important that both parties are crystal clear on how the payment will be structured. Confusion here can lead to a last-minute cancelled sale or a very unhappy seller. 

Different structures to consider include:

• All cash up front

• Seller financing or earn-outs (performance-based payments)

• Liabilities contingency or escrow holdbacks

There are other important decisions to be made along with the final structure of the sale, like whether there will be any non-competes included, what transition support will look like, and a contingency plan for what to do if revenue significantly dips post-sale. 

Any necessary financing or SBA loans are much easier to obtain when the deal structure is clearly defined and all pertinent details are accounted for. 

Never buy or sell without legal guidance 

A business attorney really should be the first non-negotiable whenever you’re considering buying or selling a business. 

The earlier you engage a legal professional, the better. You will also benefit from working with an M&A experienced CPA. 

When you have an experienced business attorney and CPA on your team, we can help you draft or review:

• Purchase agreementsEmployment/consulting contracts

• Non-disclosure and non-compete clauses

• Tax implications for both parties (especially capital gains)

The truth is that one clause in a contract can end up costing you tens- or hundreds-of-thousands of dollars or even make the deal legally invalid. 

You don’t want to leave something as serious as a business sale or purchase up to chance. Always bring in the professionals who know the ins and outs or mergers and acquisitions so you are protected from the beginning. 

Looking for support with mergers and acquisitions due diligence?

At Kliebert Law, we are well-versed in the buying and selling of businesses. We have supported buyers and sellers from start-ups to medium-sized (and growing!) businesses. 

If you want a business attorney you can trust to lead the selling or acquisition process for you, we’re here for you. 

You can fill out a quick form on our website and our team will be in touch soon!