Insider saw an article this week that got us thinking about the normal diligence procedures we complete when approaching an acquisition those steps can include:

• Reviewing and verifying financial information and cash flows
• Verifying all significant contracts including leases and service contracts
• Reviewing the validity of permits
• Running UCC searches for any liens or unpaid taxes
• Conversation with ownership on any and all written or contingent obligations of the company from which you are buying  assets

Even with the most careful and complete diligence, unexpected surprises can and do regularly occur.  So what are additional steps we can take to better protect ourselves from the unexpected.

1. You should always buy assets and not equity – There may be some tax advantages to a seller in an equity transaction, but there is nothing but risk to a buyer. In an equity transaction, you legally step into the seller’s shoes and assume all obligations. These could include written agreements, which you may know about, but also an oral agreement or email trail interpreting a contract clause that could potentially create a problem.
2. A well written asset purchase agreement is a must – Insider appreciates a well (not overly) lawyered asset purchase agreement. It can protect you as a buyer providing both clarity and remedies if the unexpected occurs. We have seen too many deals handled with only a simple bill of sale (you know who you are out there).  If you are buying one or two structures, simple can work, but on a larger transaction, you need a competent attorney to protect you with a solid APA.
3. If you have concerns for the unknown, insist on a holdback – Establish in the asset purchase agreement that a percentage of the purchase price (Insider has seen that anywhere from 5-20%) be held back from the purchase price to protect the buyer from the unknown.  If the seller is nervous, explain clearly why it is necessary and put the holdback funds into escrow so they know the funds are available.
4. If a problem pops up, be proactive – If the unexpected occurs, work immediately to identify the problem and determine what it may take to get it solved.  Insider has seen too many times when the tendency is to “ignore it and maybe it will go away”. Your stance should be it will not go away and I need to get this resolved. Focus on the solve first, then, if you have remedies under your APA, notify the seller of the issue and start discussing remedies.
5. Out of chaos comes opportunity – Some of our most loyal customers and vendors over the years have been from problems we ran into after an acquisition.  You have a government agency, vendor or customer who has been let down.  There is opportunity to be the adult in the room and calmly identify the issue, speak truth as you move to resolution and, most importantly, follow through in a timely manner on any commitments you make.

How about you? Have you had a situation you can share that was either a potential liability turned into and asset.  Or maybe a “I’ll never do that again” situation. Let us know by sharing in the comment box below.

[wpforms id=”8663″]

Paid Advertisement