How to Engage in Due Diligence Investigations for Merger Acquisitions and Licenses? : Patent Law Firm in Houston Texas
How to Engage in Due Diligence Investigations for Merger Acquisitions and Licenses
Business owners and product innovators who want to merge with other companies or license their product with a partner company have to undertake due diligence investigations before engaging in the merger or licensing. Due diligence is the process by which a business or an innovator conducts a legal, business and financial research of a company they are to engage with before doing any possible transactions. It is a way to know the obligations to assume, contingent liabilities, litigation risks and intellectual property issues that one may have to deal with, among other issues. This post by www.pandapatent.com is meant to give more insight into how to conduct due diligence investigations for merger acquisitions and licenses.
While one can undertake the due diligence investigations on their own, it is always advisable to involve a third party to conduct the process. A corporate attorney and financial officers can handle the due diligence investigation process quite efficiently.
Legal Due Diligence
Legal due diligence involves checking the legal standing of the company of interest. If it is a corporation, review its good standing certificate, certificate of incorporations, the shareholder’s minutes and agreements, director meeting and the company bylaws. In case it is a limited liability company, you can, also, have a look at its articles, operating agreement and option and purchase rights agreements.
When reviewing agreements, the main things to look at are the company’s primary contracts, insurance policies, and real estate. Have your attorney review all their agreements with major distributors, suppliers and customer, their confidentiality agreement, equipment leases and intellectual property agreements. Review all their real estate leases, purchase agreements, title insurance policies and surveys and ascertain whether their standing on these matters may affect the merger or license agreement. You should have your risk advisor or an insurance agent to review their insurance policies and determine whether they have sufficient coverage for their level of operation. Some businesses are required to maintain licenses and business permits with their local authorities. If the company you are targeting is one of them, get copies of the permits and know what documents you may require.
Get the list of all assets and liabilities that the company has. The assets and liabilities should be reasonable enough. Assets can be in the form of equipment, cash, intellectual property and real estate property, among others. Responsibilities include bank debt, employee benefits, unpaid bonuses and active lawsuit. Also, know the number of employees and their salaries. Identify the key employees in the business that will make the transition smooth or ones that will foresee the management of your licensed technology. Employee benefits, pension plan funding, and vacation entitlement affect the operations and the financial standing of the business. It is essential to have a review of these benefits too.
If you are entering into a lien transaction, ensure that you first obtain the Uniform Commercial Code information. It will help you know the financial status of the business hence help you make an informed decision.
Customer problems, also, have to be considered. You can just search the internet to see if there are any customer problems or negative publicity about the business you are going to engage. A company with poor customer relation is less likely to prosper and hence proves not to be a suitable partner to merge with or license your product. On the flip side, a business with excellent customer relations is more likely to thrive in future.
Financial Due Diligence
Your team of due diligence investigators should include a financial advisor to help you review financial due diligence material. A merger or a licensing agreement should result in a better financial performance of the business, and the economic history of a company speaks a lot about how well the company will perform in future. Some of the financial material that one has to look at include:
• Tax returns: Before entering into a merger agreement, ensure that the target company has complied with their tax obligation up to five years back. It is because you may end up being liable for their tax liabilities incurred before the merger. You should know the company’s tax obligations and obtain their actual tax returns form to ascertain that they have no tax liabilities.
• Financial statements: Get a detailed financial statement of the business for the previous five years to have a look at their financial performance. The financial reports help in making performance projections.
• Tax liens: Have your financial advisor or accountant review the tax liens of the company files on any of their assets.
The due diligence investigations is a process that can be quite overwhelming and time-consuming. Conducting the process alone, especially if you are alone, is even a more substantial task and you may not be as effective. That is why, as stated in the beginning, it is essential to engage legal and financial advisors who are experienced and have knowledge of how to conduct due diligence investigations on business. Often they have additional due diligence checklist to facilitate the assembling of all the relevant information.