Executives and business owners negotiating a merger often let enthusiasm overshadow rational judgment. They become so excited about the future prospects for the business that they don’t properly analyze the situation.
Unfortunately, mergers come with a lot of risk. Redundant positions, facilities and equipment can lead to a massive surge in operating expenses. Additionally, the combined organization that results from a merger is typically liable for issues involving either of the businesses.
Those contemplating a merger need to be thorough during the due diligence stage of preparing for the transaction. The three issues below require careful review to help protect organizations from a failed merger or massive future losses.
1. Employment practices
Several issues related to employment can cause issues and liability after a merger. Maybe one of the companies has misclassified workers as independent contractors or withheld overtime wages from hourly workers.
Perhaps there have been complaints of discrimination or harassment. Companies generally need to look into the relationships between employees and their employer before committing to a merger that may make them liable should those workers bring a lawsuit.
2. Quality control practices
Whether a business manufactures products, provides raw materials or offers services to clients, quality control is crucial. A drop in product quality might lead to defect lawsuits. Issues with incomplete or substandard services might also lead to litigation. Due diligence may involve reviewing a company’s quality control practices and doing research online to see if there are complaints against the company gathering momentum among consumers.
3. Outstanding financial obligations
Typically, conducting a financial review is a key element of due diligence before a merger. However, organizations may modify financial records or withhold certain information to make the company look more profitable or solvent than it actually is.
Instead of simply performing a cursory review of organizational finances, it might be necessary to bring in a forensic accountant or other financial professionals. A deep dive into financial records can identify discrepancies or gaps and information can protect companies from unexpected financial liability.
Fulfilling due diligence requirements before a merger can be difficult for organizational leaders. Those who have the right support while preparing for business transactions can potentially outsource much of the research required to ensure a merger is viable.
