Due diligence is a critical stage in any commercial acquisition. It is the comprehensive and necessary review in a commercial acquisition to ensure that the deal meets the needs of all companies involved. Due diligence involves the rigorous evaluation of a company’s financials, personnel, liabilities, technology, intellectual property, sales, strategic vision, and other operations concerning the health and future of the acquisition.

What Is Due Diligence?

The composition of a due diligence review depends on the transaction, the property exchanged, and the goals for each respective party. If the buyer is acquiring commercial real-estate, due diligence might include reviewing the ongoing leases, liabilities, conducting a title search, and the portfolio balance. Conversely, a business acquisition might include, the above, plus a review of employees, ongoing lawsuits, company culture, and strategic vision.

Financial Issues

Financial issues include both past performance and future projections. A typical due diligence review might include a review of monthly, quarterly, and annual projections and performance reviews, past audits, operating margins, planned capital expenditures, the financial health of current capital assets, outstanding debts and accounts payable and receivable, and tax exposure.

Technology and Intellectual Property Issues

Technology and intellectual property continue to form a significant part of any business acquisition(some businesses are acquired strictly for their intellectual property). The health of intellectual property is often determined by whether the company has successfully defended or prosecuted its rights, therefore a comprehensive review of past, ongoing, and planned future prosecution matters is necessary. Furthermore, does the company’s operation depend on retaining certain trademarks or patents? Is the company well-positioned to pivot once the patent expires? Does the company license any technology or possess licenses to use technology and, if yes, how critical are those licenses to the health of the company?

Employee Matters

The acquisition of any commercial enterprise necessarily involves absorbing employees and their attendant issues. Companies looking to wholesale acquire a business must take special note of the employee operations including:

• The employee handbook;
• Organization;
• Labor disputes;
• Consulting or contracting agreements;
• Compensation schedules (particularly bonuses) and pension and profit sharing obligations; and
• Potential layoffs and severance packages.

Customer and Sales Operations

Finally, the acquiring company must understand the culture of the target company’s customers, their concentration, competition from other enterprises, and projects in the pipeline. Specifically, who are the top 20 customers and how dependent in the company on their continued business? Are customers satisfied? Are there major warranty issues? Is there a backlog?