The process of a takeover of one company by another is always a bit confusing. This is primarily due to the peculiarities of the legal system that affects this process. Without a legal framework, even a small transaction will not be possible. In order to clarify a little bit about the company buy-out process, we suggest learning more about it from a legal perspective.
What should be kept in mind during a company buyout?
The merger process consists of several basic stages, which in turn can be divided into several smaller stages. However, compliance with applicable laws must be ensured at each of them. It is worth remembering that the legal side of a purchase or merger of companies consists of:
- Due diligence assessment. This process involves checking the parties, their activities and assets for non-compliance with the law or for any unlawful elements in them. This process is governed by general legislation and can be carried out either by special authorised government bodies or by private companies providing similar audit services. Such verification is necessary for the parties at the time of striking a deal to be sure of the bona fides of their partners and to reduce the possible risks of the deal being struck.
- Due diligence. At this stage a review of documentation necessary for completion of the deal. This array of documents may include due diligence, draft contracts, financial statements and more. The purpose of such verification is to reassure the parties that the deal is being drafted without breaching the law. Since a huge number of documents need to be checked, modern technology – such as virtual data room services – cannot be dispensed with. This will help simplify the exchange of documents and reduce the time it takes to deliver them from one party to the other.
- Checking financial statements. Before acquiring a company, it is necessary to evaluate its tangible and intangible assets. In addition, as at the due diligence stage, tax, accounting and other financial records are checked for inconsistencies, irregularities and so on. This will help to make a realistic appraisal of the assets of the company being bought, and to allocate them more appropriately after the transaction is completed. In doing so, the financial risk will be mitigated.
- Due diligence of a company. This block includes actions aimed at checking the overall working conditions of the company, its reputation among business partners and competitors, analysing the technology used in the work and the organisation of the working process, and much more. It provides an assessment of the target company’s potential, strengths and weaknesses and how these can be leveraged for the benefit of all. The results of the due diligence would also help establish a post-merger plan for smoother integration and streamlining of key business operations.
Legal due diligence is a complex set of different activities aimed primarily at finding inconsistencies with the applicable legal regulations. It is worth taking the organisation and implementation seriously and it is better to entrust its realisation to professionals. This can be either authorised persons from your company’s internal audit structures or an independent auditing company. The outcome of the transaction depends on how thorough the due diligence was.