Any acquisition is risky. We know, then, that a struggling company carries extra uncertainty. When clients call me because they are looking to buy a distressed company, we talk about the unknowns and the challenges of due diligence.
We review and resolve five areas of concern before taking on the risks of a company in trouble.
- Lawsuits. The possibility of lawsuits exists. How do the shareholders and board of directors or other control parties interface? Are they setting up each other for a lawsuit? Could you, as the acquirer, end up in the middle of a legal dispute?
- Continuity. When a company is in distress, often the focus is on the arguments and disagreement among people rather than on building the business. We want to make certain the business runs smoothly with the right personnel through the arguments and disagreements, so there’s actually something to acquire.
- Customers. Caught in the middle of a dispute, customers often decide to take their business elsewhere. We need to know the organization is working to keep customers. If customers flee, the purchase price must be adjusted.
- Books and records. Sometimes employees freak out because their company is struggling, and they neglect the books and records. They aren’t updated. Records for an acquisition are incomplete, and the possibility exists there may be penalties, fines, and other costs assessed by the government or third parties for failure to keep records.
- When a company is distressed, its management team may not act as it normally would. Managers may not be available for telephone calls. They may be looking for new jobs. Their priorities may be elsewhere.
The acquisition of a distressed company comes with many risks. The unknowns can be costly. But acquiring a struggling company can open doors that otherwise would remain closed. The purchase price can be especially attractive.
So be careful and perform thorough due diligence.
Each case is unique. Past results do not guarantee future outcomes. This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. FreeImages.com C. We.
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