Diligence is required to provide the buyer with a validation of
purchase price and a clear indication of deal risks – a
balancing act between cost and perceived risk. Diligence should be
tailored to the deal and vary depending on what is being purchased
and the complexity of the transaction. Buyers conduct financial and
legal due diligence, evaluate the financial potential of the merger
or acquisition and proceed with closing and integration. But for
some buyers, love is blind and little attention is paid to proper
due diligence. Here are a few common mistakes that may lead to
increased closing and post-closing costs.
Mistake #1 – Focusing only on financial due
Due diligence does not stop at the financial side. The buyer may
become too focused with financials to the detriment of other areas.
A systematic assessment of all aspects of the business is required
to ensure value for money. Areas of focus include legal, tax,
management, intellectual property, employment and labour and
insurance. These areas may expose the buyer to liabilities which
question, or change the state of, the financials and general
Mistake #2 – Closing a transaction, without transactional
lawyers on both sides
M&A deals can be complex, and require manpower and
dedication upfront. If the seller's counsel is not a
transactional lawyer, the purchaser's requests may be perceived
as unreasonable and daunting. There may be loss of deal flow and
lack of efficiency on both sides. A party's due diligence thus
starts with finding appropriate counsel. Transactional lawyers are
proficient in reading the due diligence and providing the necessary
protections in a purchase agreement.
Mistake #3 – Getting too invested
A buyer's investment into the deal is positively correlated
with its commitment. As more time and money is invested, it becomes
harder for the buyer to walk away, potentially leaving the door
open for sellers to extract concessions during negotiations.
Consequently, due diligence should be conducted as a matter of
priority early on in a transaction with red flags being raised
promptly before the buyer develops a heightened tolerance for risk
(and a heftier price tag).
The closing and post-closing costs of certain due diligence
mistakes can range from being minor to detrimental for either
party. Companies such as Quaker, BMW, Time Warner and Mattel have
suffered losses due to rushing a deal at the expense of proper due
diligence. Don't add your client to the list.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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