When it comes to mergers and acquisitions, thorough due diligence is crucial for sellers to ensure an accurate representation of their company. By collecting and analyzing specific elements, sellers can anticipate both past and future liabilities, enabling them to make informed decisions and mitigate potential risks.
Here are ten essential elements that sellers should consider during the M&A process.
- Copy of Buy Sell Agreement: Sellers should review this document carefully to understand the obligations and responsibilities of both parties involved.
- Directors & Officers Liability Policy: A complete copy of the Directors & Officers Liability policy, along with the supplemental application, should be collected. This will provide insights into the coverage and potential liabilities associated with the target company’s management.
- Liability Program Structure: Sellers should determine whether it follows a Claims Made or Occurrence policy, as this will impact the coverage and potential claims that may arise.
- Loss History: Reviewing the loss history of the target company for the past five years is vital. This will help sellers identify any recurring issues, potential liabilities, and assess the overall risk associated with the company.
- Organizational Chart: Obtaining both pre- and post-acquisition organizational charts will provide sellers with a clear understanding of the target company’s structure. This will help identify key personnel and potential redundancies.
- Contractual Obligations: Sellers should review existing contracts, agreements, and commitments to assess any potential risks or liabilities that may arise post-acquisition.
- Sales & Payroll History: Analyzing the sales and payroll history of the target company for the past five years will provide valuable insights into its financial performance and stability. This information will help sellers evaluate the company’s growth potential and assess any potential risks.
- Environmental Studies: Obtaining Phase 1 or Phase 2 environmental studies is essential, especially if the target company operates in industries with potential environmental risks. These studies will help sellers identify any existing or potential environmental liabilities.
- Lender Insurance Requirements: This will ensure compliance with the terms of any existing loans or financing arrangements and avoid any potential breaches.
- Location, Vehicle, and Equipment Schedule: This will help sellers assess the value of the assets and identify any potential risks or maintenance obligations.
This comprehensive checklist will help sellers stay on top of current and potential risks associated with the acquisition, ensuring a smooth and successful transaction. By understanding the target company’s liabilities, contractual obligations, financial history, and potential risks, sellers can make informed decisions and negotiate favorable terms.
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