Business owners who get impatient when pursuing the acquisition of another company will often find that they miss out on important pieces of information in their haste to quickly complete the deal, says Todd C. Baumgartner, a Partner at Brouse McDowell.
“Be thorough in your due diligence and avoid both the temptation and the pressure to pull the trigger until you’re ready.” Baumgartner says. “You need dedicated people who are going to invest time in the due diligence process to understand the target company’s culture, systems and operational philosophy. Understand that these people are going to be dedicated to this process for several months and adjust their workflow accordingly.”
Follow a methodical approach and you reduce the risk of uncovering a costly surprise after all the papers have been signed and the acquisition is complete.
Smart Business spoke with Baumgartner about four tips you’ll want to keep in mind when acquiring another company.
Tip No. 1: Structure the deal to mitigate the buyer’s risk
One way to reduce your risk as a buyer is to buy the assets of the company, but not the stock. When you also buy the company’s stock, you become the company. You now stand in the shoes of the seller and if the seller hasn’t paid taxes, you haven’t paid taxes. If the seller is being sued, you’re being sued. If you just buy the assets, most of those liabilities will not transfer to you.
To further protect yourself as a buyer, include a holdback provision in your purchase agreement requiring a portion of the purchase price to be held in escrow to cover any liabilities that might arise. You can also add an earn-out provision that reduces the purchase price if the company fails to meet a certain revenue benchmark.
There are a few compelling reasons to buy a company’s stock. Examples include a favorable lease, a customer contract that would otherwise be difficult to transfer, or existing environmental indemnification coverage that protects you against potential environmental property liabilities.
Tip No. 2: Do your due diligence
Create a due diligence checklist that ensures you know as much as you can about the company you are buying. You should understand how the company operates, what kind of benefits plans are in place and any existing HR policies, including employee vacation and flexible work arrangements.
If there is real estate involved, conduct an environmental study. If you’re buying equipment, make sure it’s in good working order and well-maintained. Perform a Uniform Commercial Code search to ensure there are no liens on the assets you’re buying.
Tip No. 3: Get assignment of all contracts and leases you need to run the business
Every company has contracts with vendors and suppliers to operate as a business. Ensure that these contracts are assignable to you. If they’re not, get consent to have them assigned to you. The same holds true for customer leases and contracts. Get all the pertinent information that will allow you to continue working with these partners of the business.
Pay particular attention to real estate leases. In almost every case, you need landlord consent to assign a contract to you. There have been cases where a buyer bought a business and went to operate in the building where the company does business and found a padlock put on the door by the landlord because consent to use the building had not been granted. As the buyer, you need to reach out to people and scrub the contracts to make sure you are in compliance and have addressed all issues. The earn-out provision can be helpful in this effort as you can incentivize the seller to help transition clients and customers to you.
Tip No. 4: Secure any intellectual property that comes with the business
If your company has a name, you have intellectual property (IP). You need to make sure you control all the IP to prevent someone from taking the company’s name and all that it represents out from under you. The company you buy may have software that runs its systems that was designed by that company. Make sure you get that software along with any other IP assets that are essential to operating the company.
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