Due diligence in the acquisition of an SME.
The importance of due diligence in the acquisition of an SME
The acquisition of a small or medium-sized corporation (SME) is a strategic opportunity that can enable a buyer to accelerate growth, expand its market or gain a competitive advantage. However, a poorly prepared acquisition can also lead to considerable financial, legal and commercial risks. This is why due diligence is an essential step in the acquisition process. This article explores what due diligence is, what it consists of, why you should call on a lawyer and what it can help you to prevent.
What is due diligence?
Due diligence is a process of in-depth analysis and verification of the financial, legal, fiscal, commercial and operational aspects of a corporation prior to its acquisition. The objective is to identify potential risks and ensure that the buyer has a clear and complete picture of the target corporation's situation.
In other words, it helps to avoid unpleasant post-transaction surprises and ensures that the investment is made with full knowledge of the facts. A well-conducted due diligence also enables the buyer to negotiate better conditions, whether in terms of price, guarantees or payment terms.
The main aspects of due diligence
Due diligence covers several critical aspects of the target corporation:
Legal verification
Examination of current contracts (customers, suppliers, commercial leases, employment contracts, etc.).
Identification of risks related to ongoing or potential litigation.
Compliance with current regulations (particularly with regard to data protection, the environment, etc.).
Financial and tax verification
Analysis of financial statements for the past few years.
Audit of debts and financial commitments.
Examination of tax obligations and risks related to possible irregularities.
Commercial and strategic audit
Assessment of the competitive position and the market.
Analysis of the main customers and suppliers.
Identification of critical dependencies that may impact the viability of the corporation.
Operational and human resources audit
Analysis of the organizational structure and key skills.
Review of HR policies and employment contracts.
Identification of problems related to corporate culture and internal management.
Why use a lawyer?
Although certain parts of the due diligence can be carried out by accountants or financial experts, the support of a lawyer is essential for several reasons:
Identification of legal risks: A lawyer can identify problematic contractual clauses, hidden obligations or risks of litigation.
Drafting and negotiating documents: The acquisition generally involves several contracts (letter of intent, share or asset purchase agreement, guarantees, etc.) that the lawyer can draft and adapt to the buyer's needs.
Regulatory compliance: Ensuring that the target corporation complies with applicable laws and regulations.
Risk mitigation strategy: A lawyer can propose contractual guarantees to protect the buyer against possible future problems.
What due diligence helps to prevent
The absence of due diligence or incomplete due diligence can lead to many negative consequences. Here are some problems that due diligence helps to anticipate:
Discovery of hidden liabilities: An unpaid debt, an ongoing dispute, unknown contractual commitments.
Non-compliance with regulations: Problems with respect to tax laws, labor law or environmental obligations.
Overestimation of the value of the corporation: If the real profits are lower than those presented by the seller.
Intellectual property issues: A poorly protected patent or trademark can be a source of conflict.
Excessive dependence on a single customer or supplier: A high concentration of sales with a single party can represent a significant risk.
Conclusion
Due diligence is a crucial step in the process of acquiring an SME. It allows risks to be identified and mitigated, a clear view of the targeted corporation to be obtained and a secure transaction to be ensured. Calling on a lawyer specialized in business law is essential to guarantee an exhaustive verification and protect the buyer's interests. A well-conducted due diligence is not only a guarantee of security, but also a strategic asset to maximize the value of the investment.