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Why due diligence matters in acquisitions

Due diligence is one of the most important steps in the merger and acquisition process. Typically, buyers and sellers both engage in due diligence to ensure that they can close on a transaction in a timely and confident manner. It can also help to ensure that a sale or merger will pass muster with investors and Washington authorities.

Verify information

The primary reason to go through the due diligence process is to verify information presented by all parties involved in a transaction. For example, buyers can confirm that sales figures, profit margins and other key facts are accurate. Sellers will often do their diligence prior to putting their company on the market to ensure that they are asking for a fair market value.

Put a plan in place

During this process, both sides can work to create and execute a plan that allows for a smooth transfer of ownership. If necessary, a business transaction plan may involve leadership from the entity being acquired remaining with the new company until the acquiring entity feels comfortable running it. Having a plan may also make it easier to determine how many employees may need to be bought out or outright terminated as part of the deal.

Due diligence is an investment

It may cost thousands of dollars to organize, obtain and verify data presented by a buyer or seller. However, spending that money may allow a buyer or seller to identify issues that might result in greater expenses in the future. For instance, if a seller fails to disclose the fact that it is currently in litigation, the buyer could be liable for legal fees incurred after the merger closes.

Generally speaking, a merger or acquisition is final once a deal closes. At that point, you typically assume any assets or liabilities that the acquired business had. Therefore, it’s important to perform adequate due diligence to ensure that you’re aware of any issues before this happens.