Smart Business Magazine, September 2016

96 Smart Business Cleveland September 2016 Make an informed decision Due diligence is a critical tool when entering into an M A transaction Business owners should take the time to perform thorough and smart due diligence before entering into an M A transaction says Elizabeth G Yeargin a Partner at Brouse McDowell It is better to spend time and money on the front end of a deal uncovering risks and learning the ins and outs of the potential target than to blindly enter into a deal Yeargin says You may end up spending extensive amounts of money post closing for liabilities that should have been uncovered during an appropriate due diligence process This process enables the buyer to make a more informed decision about whether to move forward with a transaction but the effort can also be very useful to the seller Due diligence is important to sellers because it gives them the necessary information to determine a realistic valuation for their business so they dont leave money on the table Yeargin says Smart Business spoke with Yeargin about due diligence and what you need to know before finalizing your next M A transaction How informed is the typical buyer going into an M A transaction Two factors that often have the most impact on the approach a buyer takes toward an M A transaction are the size of the deal and the relationship the buyer has with its legal counsel Companies will often spend less time and money if its a smaller transaction because they see the risk as being smaller But you run into some of the same issues when trying to complete a deal whether youre buying something for 50000 or 50 million Regardless of the size of the target you need to dig into the potential legal and financial risks uncover potential liabilities and get assurance that the benefits of the deal outweigh the potential dangers You can then use that information if you decide to move forward to determine or adjust the purchase price for the target The relationship you have with your legal counsel is another key component If you work closely with your legal representatives and stay in contact on a regular basis youre more apt to have that team involved in the M A process from the beginning to provide information and answer any questions that you might have along the way If you havent worked as closely with your legal partners it makes the process more difficult and creates more risk The best advice is to take steps to build a stronger partnership with your legal team before you enter into negotiations to buy or merge with another company What areas should you focus on as you conduct your due diligence Buyers typically are adept at reviewing another companys management team and the big picture financials such as revenue sales volume and personnel costs But you also want to review the condition and composition of that companys assets How much real estate if any does the company youre looking to purchase own and are there any environmental issues with that property What about intellectual property IP What does that companys customer base look like What supplier or material contracts are in place You also want to be aware of any litigation or product liability issues that might pertain to that company as well as matters that involve employee benefits labor unions insurance taxes or potential anti trust concerns How do you address successor liability issues As a general rule sellers prefer equity purchases while buyers prefer asset purchases Sellers will usually favor an equity deal because it allows them to completely walk away often free from any future obligations with respect to the business With a buyer the advice is typically to do an asset deal You pick and choose your assets and you also pick and choose which liabilities you are willing to assume As an asset purchaser youre not going to assume litigation that involves the seller or take on debt with the sellers lender If you decide to do an equity deal and assume the sellers liabilities youll want to keep that in mind as you determine what youre willing to pay for the business Youll also want to work with your legal team to structure the agreement to include representations from the seller and indemnification against the risks youre choosing to take on in the deal ELIZABETH G YEARGIN Partner Brouse McDowell 330 434 4824 eyeargin@ brouse com Insights Legal Affairs is brought to you by Brouse McDowell WEBSITE To learn more about the value of due diligence in your companys next M A transaction visit www brouse com INTERVIEWED BY MARK SCOTT INSIGHTS LEGAL AFFAIRS