Have you ever think about company acquisitions, and the phrase "legal due diligence" came up?
Do you wonder what "legal due diligence" means?
Most definitions of the legal due diligence say something like "due diligence is a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances; not measured by any absolute standard but depends on the relative facts of the special case." In other words, to a potential acquirer, legal due diligence means "making sure you get what you think you are paying for."
Practically speaking, for any company acquisition, legal due diligence would include fully understanding all of the obligations of the company: debts, pending and potential lawsuits, leases, warranties, long-term customer agreements, employment contracts, distribution agreements, compensation arrangements, and so forth. Furthermore, for your company investments and acquisitions, legal due diligence also includes
• Understanding any ownership issues relative to the business of the company that is going to be acquired or invest in. For example, did the company really develop properly in its business.
• Will there be any special issues in maintaining the business.
"Legal Due Diligence" typically takes the form of the acquirer's list of several hundred questions and/or requests for copies of documents that you, as the potential seller, must answer for the seller on or before some date.
For the owner of the company, legal due diligence can be a very difficult and painful experience. It's difficult because you are essentially trying to prove a negative, the absence of any problems. The potential acquirer may keep coming back to you with more and move invasive requests, until you are about ready to scream "do you think I'm a crook? I told you we didn't have anything to hide!" Put yourself in the position of someone who is spending millions of dollars for something they can't see and can't touch, and perhaps you will understand a little better. It's painful because it's hard not to be insulted by questions like "Have any of the principals of the company ever been convicted of securities fraud? List all criminal convictions of the principals of the company."
If you are the owner of the company, the time to start thinking about legal due diligence is now. Every decision that you make, test it against the question "how will this look when someone comes along asking hard questions?" Every company is going to have to go through legal due diligence someday — when you are acquired, seek outside investment, or go public — unless you intend to remain small and family-owner forever.
As a seller, seeking outside investment or just decide to go public, you will also want to do your own legal due diligence on the acquirer. Do they actually have the funds to complete the transaction? If they are paying you with stock, what is the record of the stock? Is it likely to still be worth anything when your lockup period expires? How are they going to treat your employees? Are your corporate cultures compatible? If there is a large "earn out" component to the deal they are proposing, do they have a track record of successfully marketing products like yours? What is their incentive to do so? Are you sure? What happens if they do not? Will the acquisition stretch them — in terms of capital, management or otherwise — to the point that it will reduce their chances of success? Do they have a reputation for living up to the letter and the spirit of their commitments? How will they treat your customers? Will you be proud to be associated with this company?
Do you wonder what "legal due diligence" means?
Most definitions of the legal due diligence say something like "due diligence is a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances; not measured by any absolute standard but depends on the relative facts of the special case." In other words, to a potential acquirer, legal due diligence means "making sure you get what you think you are paying for."
Practically speaking, for any company acquisition, legal due diligence would include fully understanding all of the obligations of the company: debts, pending and potential lawsuits, leases, warranties, long-term customer agreements, employment contracts, distribution agreements, compensation arrangements, and so forth. Furthermore, for your company investments and acquisitions, legal due diligence also includes
• Understanding any ownership issues relative to the business of the company that is going to be acquired or invest in. For example, did the company really develop properly in its business.
• Will there be any special issues in maintaining the business.
"Legal Due Diligence" typically takes the form of the acquirer's list of several hundred questions and/or requests for copies of documents that you, as the potential seller, must answer for the seller on or before some date.
For the owner of the company, legal due diligence can be a very difficult and painful experience. It's difficult because you are essentially trying to prove a negative, the absence of any problems. The potential acquirer may keep coming back to you with more and move invasive requests, until you are about ready to scream "do you think I'm a crook? I told you we didn't have anything to hide!" Put yourself in the position of someone who is spending millions of dollars for something they can't see and can't touch, and perhaps you will understand a little better. It's painful because it's hard not to be insulted by questions like "Have any of the principals of the company ever been convicted of securities fraud? List all criminal convictions of the principals of the company."
If you are the owner of the company, the time to start thinking about legal due diligence is now. Every decision that you make, test it against the question "how will this look when someone comes along asking hard questions?" Every company is going to have to go through legal due diligence someday — when you are acquired, seek outside investment, or go public — unless you intend to remain small and family-owner forever.
As a seller, seeking outside investment or just decide to go public, you will also want to do your own legal due diligence on the acquirer. Do they actually have the funds to complete the transaction? If they are paying you with stock, what is the record of the stock? Is it likely to still be worth anything when your lockup period expires? How are they going to treat your employees? Are your corporate cultures compatible? If there is a large "earn out" component to the deal they are proposing, do they have a track record of successfully marketing products like yours? What is their incentive to do so? Are you sure? What happens if they do not? Will the acquisition stretch them — in terms of capital, management or otherwise — to the point that it will reduce their chances of success? Do they have a reputation for living up to the letter and the spirit of their commitments? How will they treat your customers? Will you be proud to be associated with this company?
No comments:
Post a Comment