Common Factors that Influence the Scope of a Due Diligence Review in Private Acquisitions

When conducting due diligence in private acquisitions, several factors can influence the scope of the review. These factors include:

Deal Structure

The type of transaction being undertaken is crucial in determining the correct deal structure. For instance, if the buyer is looking to purchase all assets of a company or business, this will determine the best approach for the parties involved. A thorough legal due diligence should also be conducted based on the transaction’s structure.

Industry

The industry in which the target business operates can influence areas of due diligence that the buyer will focus on. Special regulations, permits, and authorizations may be required depending on the type of industry.

Global Presence

If the target business has global operations, it is essential to assess compliance with applicable trade controls and anti-bribery and corruption laws.

Competition

If the buyer and seller compete in the same market, they may require authorization by the COFECE (Mexico’s Federal Economic Competition Commission) to carry out the transaction. Confidentiality agreements may also be necessary to protect sensitive information.

Purpose

The purpose of the merger or acquisition can influence the scope of due diligence. For instance, if the buyer is looking to acquire a company for its intellectual property, this will require a different level of due diligence compared to an acquisition driven by synergies between the two companies.

Environmental and IT Due Diligence

Depending on the nature of the target’s business, environmental and IT due diligence may be necessary to investigate potential liabilities and ensure that the buyer is fully aware of any risks involved.

Additional Considerations

When conducting due diligence in private acquisitions, it is also essential to consider the following:

• Warranties and Indemnities: The buyer should ensure that warranties and indemnities are sufficiently wide and specific to protect itself from potential claims.
• Retaining Purchase Price: The buyer may want to negotiate a retention of the purchase price to cover potential warranty claims or price adjustments.
• Closing Conditions: The buyer should determine the closing conditions that must be met before the transaction is completed, including any necessary consents or approvals.
• Expert Involvement: Depending on the nature of the target’s business, it may be necessary to involve experts such as environmental consultants, IT specialists, or other relevant specialists.

Case Studies

The article highlights two specific case studies that illustrate the importance of due diligence in private acquisitions:

1. Environmental Due Diligence: The acquisition of a manufacturing company raised concerns about potential environmental liabilities and the need for environmental due diligence.
2. IT Due Diligence: The acquisition of an IT company highlighted the importance of investigating IT assets, including intellectual property rights, skilled personnel, and transitional service agreements.

Conclusion

Conducting due diligence is a critical step in private acquisitions, as it allows buyers to fully understand the target’s business, identify potential risks, and negotiate appropriate warranties and indemnities. By considering these common factors that influence the scope of due diligence, buyers can ensure that they are adequately protected and prepared for any potential issues that may arise during the transaction process.