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Published on: 18 January 2018

Acquisition plans? Always perform due diligence

Due diligence is a must for a successful company acquisition and to prevent that there are skeletons in the closet. This is also true for SME companies. There is a misconception that the risks associated with an acquisition of SME companies are less severe and that due diligence is unnecessary because of this.

What does due diligence mean?

Due diligence is aimed at determining the accuracy of the information presented to the buyer. Due diligence is focused on the financial, tax, legal, and commercial aspects of the company. Depending on the nature and size of the company to be acquired, due diligence can be supplemented with environmental, intellectual property, human resources, or IT related issues. The due diligence report describes the strong and weaker points of the company. This can lead to eye-openers that are important for the deal.

The importance of due diligence

So always conduct due diligence when you are about to take an important investment decision as an entrepreneur. It is also important that the “letter of intent” includes a provision that states that the outcome of the due diligence can be a resolutive condition or could result in changing the conditions of the transaction. For instance, the purchase price can be amended or indemnities and/or guarantees can be included. An entrepreneur can demand an indemnity or guarantee in the event that risks are identified that could lead to high costs in the future. These concern so-called contingent liabilities.
The purchase price can be adjusted if it turns out that the real numbers differ from the expectations the buyer had when he made an offer.

Six frequent reasons for adjusting the purchase price after due diligence:

  • Assets (such as debtors) are recorded too high;
  • Liabilities are not fully accounted for;
  • An important customer is lost;
  • Margins are staying behind;
  • Changes in the cost structure;
  • Change of control clauses in important contracts.

Obligations of parties to provide information and to disclose

A buyer has an obligation to investigate, and the seller has an obligation to provide information.
There is always a field of tension during the acquisition and due diligence process between the obligation to investigate and the obligation to provide information. The seller has an obligation to provide information and/or to disclose. So the seller cannot state that you as the buyer have to collect all important information and that you bear the risk if you do not do this. On the other hand, you as a buyer do have an obligation to investigate. So you cannot just simply demand all kinds of guarantees from the seller. You will have to investigate this. Because the risk of not sufficiently investigating is that you cannot rely on certain defects, and even (in some cases) that you cannot rely on a guarantee. Due diligence is specialist work. It is therefore advisable to engage an attorney specialized in take-overs or acquisitions to assist with the negotiations with respect to the letter of intent and the take-over contract. Then you are ensured that the guarantees are watertight. Naturally, Fruytier Lawyers in Business will gladly assist you with this.

Articles by Mignon de Vries

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