Businessmen seeking to expand their business in the US can do so by buying a company that has gone through an M&A process. However, one should not forget that acquiring a company may require conducting a proper audit of all its previous & current activities.
Nowadays, buyers are increasingly facing the problem of conducting due diligence for M&A deals. In this article, we will be looking into the main obstacles purchasers are likely to encounter while acquiring companies in the US.
Importance of DD for M&A Deals
DD is a process whereby the buyer can ensure that the company they are going to acquire meets all their expectations in terms of assets, liabilities, and customer base. By doing so, they will protect themselves from being misinformed about the acquired assets.
DD’s objectives include:
- ensuring that each of the assets corresponds to the purpose for which it was acquired
- assessing risks and avoiding unknown risks and obligations
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Types of DD
- DD for real estate deals
Based on the complexity of a transaction & types of assets acquired, purchasing real estate in the US may require performing DD of varying degrees. When it comes to real estate deals, the buyer must not only ensure that the property is exempt from all legal claims or collaterals, but also determine whether the property is suitable for its intended use.
It is also worth conducting an environmental assessment which will reduce the risk of liability in the event of the acquisition of real estate with poor environmental conditions.
- DD for deals involving tangible assets
Conducting a thorough audit of tangible personal property involves making sure that it is in the ETK database. This type of check will help determine if there are any security interests encumbering the property.
In addition, verifying ownership certificates for any named assets will help determine whether the seller actually owns the assets to be acquired.
A physical inspection of the property can also help the buyer during the DD period. It may help determine the condition of the object and ensure that it meets the purpose for which it is acquired.
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- DD for deals involving intangible assets
DD is also an important step in confirming that there are no issues with regard to intangible assets and that these assets are consistent with their purchase price. One of the main types of intangible assets is IP, which is why it is important to make sure that the seller actually holds IP rights enabling them to transfer them in a legal way. This can be achieved by examining the US Patent and Trademark Office database and other online databases. If the seller’s IP rights are covered by a license, it is important to ensure that the seller complies with the terms of the license.
- Other areas where DD is important
There are many other aspects of buying a business in the US that require careful verification. Taxes and obligations of a potential successor that may arise due to non-payment or non-filing of tax reports are an important aspect of buying a business. The successor needs to make sure that the taxes of the predecessor are paid and that tax returns are filed by the required deadline. Timely payment of taxes is crucial, and any refusal to pay them may entail personal responsibility of the buyer.
It is also important to understand and evaluate employee benefits related to acquiring a business in the US. The types of employee benefits that need to be assessed include: paid leave, retirement benefits, and health insurance. Compensation claims by employees must also be taken into account during the DD period.
Technology plays an important role in the way many businesses operate. Therefore, it is imperative that the potential buyer understands what type of technology is used in the acquired business and how it works. Understanding this type of information & determining whether the technology used is up-to-date and functioning properly will prevent the buyer from spending money on upgrading the technology used. Software and licenses must be transferred to the assignee, and any technology used for asset management, such as equipment or accounting software, must be up-to-date and reflect accurate data.
DD is one of the most important processes in evaluating any purchase. Therefore, buying a business in the US involves understanding potential risks & liabilities. It also requires knowing about the state and nature of all the assets of the business to be acquired.
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