Forming a Due Diligence Request List During COVID-19
While the COVID-19 pandemic still continues in 2020 and into 2021 until a vaccine or treatments are discovered, mergers and acquisitions have not stopped in an uncertain economy. Businesses and entrepreneurs have been sitting on cash and are waiting on attractive business targets. They may even be ready to proceed to purchase similar businesses in order to expand. Due diligence is key in this process, as due diligence determines if the business target is desirable to the buyer in either a stock or asset purchase. The key items of consideration include the seller’s corporate documents, bookkeeping and accounting documents, current or potential legal and litigation issues, employment issues, intellectual property ownership, ownership or lease of any property involved, and whether all taxes have been paid to local, state, and federal governments. Although this is not an all-inclusive due diligence request list, these are some key considerations to keep in mind:
Investigate whether the target seller has their corporate formation documents in order, including special and annual resolutions, and also examine their partnership or corporate structure and management structure. Some items on your due diligence request list to obtain from the seller include their corporate books, a structure chart or tree, and a record of which officers or managers have equity in the company.
Legal and Litigation
A general request in this area would be asking whether there have been any lawsuits or arbitration in the last three to five years and whether the seller has complied with all local, state, and federal laws. This will help you determine if they are the type of business that needs to get permits or register with certain governments.
You need to know of any contracts with any employees or contractors, any issues with past employees or contractors, and the current benefit plan(s) for those employees. A key consideration when compiling your due diligence request list includes thinking about how to transfer employees from one benefit plan to another.
This is an expansive category, as it involves not only intellectual property the seller owns, but also what licenses the seller pays for, and whether those licenses are transferable.
Does the seller own the property where the business is located or lease the property? The key question at hand is whether the property is also being purchased by buyer or whether the landlord needs to be involved for a lease assignment.
Accounting and Taxes
The value of the business depends not only the assets or the stock, but also whether the accounting is in order and taxes have been paid. Another item to note on your due diligence request list is to have a good accountant review the accounting and dig into the tax implications, as that can sometimes kill a deal.
Musgrove Law Firm, P.C. not only negotiates letters of intent and purchase agreements in mergers and acquisitions, but we also assist clients in due diligence if there is a need. Our firm works on small to middle-market deals, and our clients have always appreciated the knowledge we can provide for their due diligence request lists. Contact us today to schedule a consultation!