Commercial Law Attorneys
Pre-inspections before acquiring a business
Due diligence, is a necessary step before acquiring a business. The role of the test is to provide the investor with a broad, thorough and exhaustive picture of the state of the business being sold, which will present him with the risks in the acquisition alongside the potential for profitability. If done correctly, the due diligence should prevent unpleasant surprises for the investor after the purchase, particularly those of which, if he had been aware of in advance, would have avoided making the transaction. What does due diligence include, and what findings can be revealed in its framework?
By Igal Mor, Adv. & Notary
Accuracy in Legal Advice. Excellence in legal support.
What areas are included in due diligence test?
The examination procedure should include all aspects of the business, the scope of which should match the company’s structure and the range of the investment. Below are some issues that need to be examined and analyzed as part of due diligence. An examination refers to the company’s financial strength based on financial-economic data, including accounting reports, cash flow statements, credit and loan information, repayment tables, debt collection proceedings, lost debts, business plans, economic risk management policies, and more.
The second factor is the product or service offered by the company, including its production process, market shares, the possibility of increasing them, the presence of competing products and how the company positions itself against them, and so on.
The third element is the legal aspect, which always takes a prominent place in due diligence. And it examines the information contained in corporate holdings, intellectual property aspects (trademarks, patents, copyrights, and so forth), legal claims, exposure to legal risk, and insurance policies and their business needs. Due diligence will also include the list of customers and suppliers, the credit terms given to them, the marketing strategy of the business, and the like. It is important to note another aspect regarding organizational structure, which includes the company’s employees and their number, including the ratio between senior and junior employees, wage expenses, terms of employment, and the like.
Sample findings:
Having reviewed some of the areas examined in due diligence, what are the various findings that this test can reveal? Some examples:
- Inefficient financial management: All the financial statements submitted to the investor can reveal a problematic picture of incorrect financial management from various aspects, from non-financial inventory management policy to taking out expensive loans and raising capital. Sometimes these findings can get the potential buyer to withdraw from the deal or estimate its value differently than initially assessed.
- Inappropriate organizational structure: this can be manifested, among other things, in the inefficient division of the various departments in the company, poor communication between the different bodies, inappropriate policy of employing employees, and more. The investor will be required to understand the magnitude of the organizational change needed and decide whether the acquisition is worthwhile for him in these circumstances.
- Outdated technology: A business lagging technologically will find it very difficult to be a strong competitor in the market. The purchase of new technology often involves high costs and many resources to implement it. Therefore, if such a finding is discovered, it will undoubtedly be a significant and crucial consideration for the investor.
Support From a Lawyer is Essential
Conducting due diligence is one of the most critical steps to take before purchasing a business. The purpose of due diligence is to give the investor a snapshot of the company in all its aspects and enable him to make an informed decision regarding the transaction’s viability. Sometimes, the investor is the one who wants to carry out the inspection procedure, and sometimes, it is the sold company that offers this on its initiative to prove the resilience of the business and the profitability of its purchase. Naturally, each due diligence will raise various deficiencies. Still, the question is their nature and whether they have the potential to cause the investor to withdraw from the transaction. As part of any purchase transaction, the investor needs professional legal assistance that will address all aspects, including performing preliminary examinations regarding the feasibility of the transaction, such as due diligence. An attorney will take care of obtaining all the necessary documents and data from the company and will assist when necessary with the relevant professionals to analyze and produce a complete and exhaustive report which will serve as a critical tool in the investor’s decision on the viability of the transaction.
In conclusion, acquiring a business requires a variety of preliminary inspections and should preferably be done by professionals. After deciding to buy an existing business, it is imperative to seek the help of an attorney who specializes in commercial agreements. We invite you to consult us regarding the purchase of businesses.
You are invited to consult with us on matters related to the purchase of a business and legal support for an existing business.
Legal advice for business acquisition
Are you preparing to purchase a business? We invite you to consult with us in connection with the legal aspects related to the purchase of a business.
Adv. Mor & Co.’s commercial law department has experience in representing various entrepreneurs, businesses, and corporations from Israel and abroad in a wide variety of legal areas.
