The COVID-19 pandemic has had a devastating effect on the global economy, and even after the emergency measures taken by the Federal Reserve, the Dow Jones Industrial Average plummeted nearly 3,000 points in a single day. This plummet was one of the steepest falls ever recorded, second only to the 1987 “Black Monday” market crash.
This global crisis has brought many small, medium, and even large businesses to the brink of danger, but one of the best ways to tackle this situation is with the help of mergers, acquisitions, and joint ventures.
In fact, 23% of business leaders believe that mergers and acquisitions would be one of their main strategies to help boost growth in the coming years, according to a press release by KPMG. This survey also revealed that 49% of business leaders have a high “M&A appetite.” Because of these factors, the value of global merger and acquisition deals has risen to $3.9 trillion in 2018, according to information provided by Statista. And while M&A can be profitable for an organization, they are also complex matters. Here are some of the common mistake companies make during mergers and acquisitions.
Lacking Due Diligence
Before buying a business, it is vital that you are completely aware of what you are getting yourself into. This means being aware of what the company has borrowed, leased, owns, and is owed, according to experts at Praxis Legal Solutions. Making the decision to buy a business without doing your due diligence is the most common reason for a failed merger and acquisition deal. Some of the things you must check before making this decision include the following.
- The financials of the company, such as the profit and loss statements, current balance sheet, audited financial statements, tax returns, asset list, payable and receivable accounts and debt schedule.
- Intellectual property
- Contingent liabilities
- Payroll details, including tenure
- Physical assets and real estate
- Insurance coverage
- Information regarding customers
- Real estate and physical assets
- Details about employees, including non-solicitation, non-disclosure, and non-compliant agreements.
Not Having the Right NDA
A well-crafted non-disclosure agreement is essential for protecting the proprietary information and secrets of your company. Although it is not necessary to have an NDA when you first contact the buyer, engaging in full disclosure without an NDA would be a mistake. The agreement should prohibit the buyer from disclosing or using any confidential information and should also restrict the ability of the buyer to contact customers, employers, and suppliers. This will ensure that the buyer does not solicit or hire the seller’s employees until the deal is finalized.
Not Establishing a Non-Compete Agreement
A non-compete agreement becomes important once the deal has been completed. This type of agreement prevents the seller from establishing a competing business within a particular frame of time. The agreement should not only contain the timeframe but also the geographical scope where the new business can or cannot be established.
Not Getting the Right Counsel and Financial Advisor
When choosing a lawyer to help you draft contracts and negotiate during merger and acquisition process, it is important that you do not opt for a general lawyer. It is vital that you choose someone who specializes in handling mergers and acquisitions as there are many complicated issues that can come up that require thorough understanding of customary market terms, laws, and the legal landscape.
Getting the right financial advisor or investment banker can help you in the development of an optimal sale process as well, as they will help negotiate price and deal terms.
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