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Conducting Due Diligence During a Merger

Published July 14, 2010

If you plan to acquire a business through a merger, you will need to conduct an in-depth investigation of that business before proceeding with the transaction. This process is called due diligence, and it often requires careful review of documents by a corporate attorney. By conducting due diligence on the target business, you will gain a thorough understanding of it, which will enable you to ascertain a fair purchase price and to identify business liabilities for which you may be responsible once you become owner.

When conducting due diligence during a merger, you should review the following elements:

You should carefully review the corporation or LLC documents of the company with which you are seeking to merge. If the target company is a corporation, you should review the certificate of incorporation, the company’s by-laws, minutes of shareholder and director meetings, and any shareholder agreements. If the target company is an LLC, you should review the articles of organization, the operating agreement, minutes of membership meetings, and manager agreements. Your corporate attorney may advise you to consider other documents in addition to these.

You must also carefully review all of the existing agreements between the target company and other involved parties. This includes review of all loan agreements, major supplier and customer agreements, confidentiality and non-compete agreements, intellectual property agreements, and equipment leases. Moreover, it will be important to review all insurance policies carried by the target business to determine if the present coverage is adequate. You will also need to have your corporate attorney review a list of the target company’s assets and liabilities. Before merging with the target company, you will want to make sure you know exactly what the company owns and owes. Having this important information is one of the keys to a successful merger.

Due diligence is important because, depending on its findings, you may want to incorporate certain seller obligations in the contract, such as clearing any liens on the assets of the business or obtaining required third party consents. Your corporate attorney may suggest other areas of investigation, each of which should be carefully considered before moving forward with the merger.

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