Last week’s blog discussed a local business merger which may have raised important questions concerning mergers and acquisitions and the process of buying a company. Companies are able to enjoy growth opportunities through mergers and acquisitions. For a merger or acquisition to be a positive growth opportunity for any company, however, the proper due diligence and research must be conducted. In addition, important legal ramifications and possible liabilities must also be carefully considered. The first step in acquiring or merging with a business is to determine which business is the best business for you and your company.
Following a determination of the business you wish to acquire or merge with, it is important to conduct due diligence to verify that the company is financially healthy, financially sound and does not have too much debt. During this process, it is important to review financial statements, income statements, accounts receivables and tax returns, including tax returns dating back five years. Sales tax records should also be closely examined because, in some circumstances, a new business owner can be responsible for previously unpaid sales taxes. It is also important to have an understanding of the business’s cash flow.
It is important to familiarize yourself with the company’s legal obligations and ensure the business is fully compliant with any relevant legal requirements and is also in compliance with tax laws. Also ensure you carefully review any documents related to employees that may be part of the merger or acquisition. Existing employment agreements can be an important aspect of the transaction. It is also important to determine if you are purchasing the entire business or only the assets of the business. Lastly, ensure you understand the current business entity of the company, as the structure dictates tax consequences and personal liability; you may also want to consider changing the business entity to suit your needs and goals.
Because there are a significant number of important considerations when acquiring a new business, it is important to have the confidence that you fully and thoroughly understand all of the important steps involved in the process when considering a merger or acquisition. While the process can be complex, with the proper knowledge and guidance, it does not have to be overwhelming.
Source: Small Business Administration, “Buying a Business – Key Legal Steps and Considerations to Bear in Mind,” Caron Beesley, March 2, 2012