Due Diligence

Texas M&A Due Diligence Attorneys

Due diligence refers to the investigation or careful examination of a business’s assets, liabilities and legal compliance before entering into a sale or purchase agreement. It's essentially doing your homework to understand the potential risks and benefits involved.

Whether acquiring or selling a business or business assets, due diligence is a critical (and sometimes cumbersome) process.

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Where Does Due Diligence Fit Into The M&A Process?

After some initial negotiations, both the buyer and the target company will sign a letter of intent. This is a non-binding agreement outlining the key terms of the potential deal, often including exclusivity clauses for a set period to conduct due diligence.

Next comes the due diligence period. This is where a significant amount of time and resources are dedicated.

Then, based on the findings of due diligence, the buyer and seller negotiate the final terms of the M&A deal, reflected in a business purchase agreement that is legally binding.

Finally, it’s closing day. This stage involves finalizing all necessary paperwork, approvals, and transferring ownership of the target company or assets to the buyer according to the terms of the purchase agreement.

The transactional team at Hendershot Cowart P.C. can walk you through all phases of the M&A process from the initial contact and reviewing or drafting the letter of intent to negotiations, the closing, and beyond.

Call (713) 909-7323 today to get started.

Why Is Due Diligence Important?

Due diligence minimizes surprises and protects you from entering a bad deal.

The M&A due diligence process is designed to:

  • Uncover Risks and Liabilities: Does the business have ongoing litigation, unresolved insurance claims, compliance issues?
  • Verify Information and Data: Confirm the information presented by the seller regarding financials, contracts, customers, and other crucial aspects.
  • Examine Revenue, Costs, and Profitability: Get a clear picture of financial patterns and factors that influence cash flow before you buy the business.
  • Ensure Common Accounting Standards: Differences in accounting standards adopted by your company and the target company could impact financial reporting accuracy.
  • Value the Target Company: Due diligence meticulously examines the target's financial history and its business model, market position, growth opportunities, and competitive landscape to help estimate future cash flows. It can also assess the value of the target company’s intangible assets, such as intellectual property, brand, and customer base.
  • Establish Negotiation Leverage: The findings from due diligence can be used to negotiate a better price or terms in your favor. This can help avoid overpaying for a company with hidden problems or undervaluing a company with strong potential.

Who Performs Due Diligence?

The buyer typically performs the due diligence. However, the onus is on the seller to respond to requests for information. This process is easier if the seller is well-prepared and can promptly provide all requested documents.

How Long Does It Take to Conduct Due Diligence?

The process can take one to three weeks for smaller, less complex businesses; several months for mid-sized companies; and up to a year for large corporations with intricate structures.

Delays can arise when the seller’s information is scattered, incomplete, or requires significant back-and-forth communication for clarification.

How Our M&A Attorneys Help the Buyer Conduct Due Diligence

As part of your team, our transactional attorneys can work with the target company’s team to request critical information, evaluate documents, and identify missing or additional information necessary to make an informed decision.

Our firm starts the inspection period with a 100-point due diligence checklist and then customizes it to each client’s unique transaction.

Here are the broad categories we cover when performing due diligence on behalf of our acquiring clients:

  • Legal and ownership matters, such as the articles of incorporation or certificate of formation, operating agreements, and organizational charts;
  • Financial matters, including audited financial statements, written budgets, accounts payable and receivable, debt schedule (as applicable), and more;
  • Tax information;
  • Bank and credit arrangements;
  • Government and regulatory issues;
  • Real and personal property, including leases;
  • Intellectual property (trade secrets, trademarks, patents, copyrights) and the methods the company uses to protect that intellectual property;
  • Business matters, such as key suppliers, client lists, a list and copies of all material contracts or agreements in place, and more;
  • Contract compliance, fulfillment, and assignability;
  • Compliance policies and any investigations or audits by enforcement agencies;
  • Employees, compensation, and benefits;
  • Insurance coverage and claims history;
  • Pending, resolved, or threatened litigation or legal actions;
  • Plus, any miscellaneous information the officers of the company deem material.

How Our M&A Attorneys Help the Seller Respond to Due Diligence Requests

If you are the selling company, involving an M&A attorney in the due diligence process is recommended, simply due to the volume of information exchanged and the risk of post-closing disputes if the information is incomplete or inaccurate.

  • Managing Document Requests: Due diligence often involves a barrage of document requests from the buyer. An attorney can help organize and streamline the document production process, ensuring the target company provides all necessary information efficiently while safeguarding sensitive data.
  • Contract Review and Negotiation: Many legal contracts come into play during M&A due diligence, such as non-disclosure agreements, licensing agreements, employment contracts, and real estate leases. Our transactional attorneys can review these contracts to ensure your interests are protected and negotiate necessary modifications.
  • Protecting Privileged Information: Our attorneys can help you identify and protect privileged and confidential information, such as trade secrets or attorney-client communications, that may be requested during due diligence.
  • Negotiation Strategy: Our attorneys can advise you on negotiation strategies throughout the M&A process, including addressing any potential deal-breaking issues discovered during due diligence.
  • Maintaining a Level Playing Field: An experienced M&A attorney can also ensure you are not taken advantage of by the buyer's team and that you receive a fair value for the sale of your business or business assets.

It can be a full-time job to find, track, and exchange documents, especially if records are dispersed among several locations or stored primarily in hard copy. Our team of transactional attorneys can act as a trusted advisor for you throughout the process of selling your business equity or assets, including due diligence.

Contact Our Texas M&A Due Diligence Attorneys

Our M&A attorneys can help ensure the transaction is conducted smoothly, your interests are protected, and that you are positioned for the most favorable outcome in the deal.

If you would like to discuss a potential business sale or acquisition, or to speak personally with an M&A lawyer about the due diligence process, call (713) 909-7323 or contact us online.

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