Are you wondering why due diligence is crucial in any merger or acquisition?  The Harvard Business Review, and many industry leaders quote a more than 75% failure rate, nationally, in corporate mergers and acquisitions.  The failure to conduct thorough due diligence is the primary reason mergers and/or business acquisitions fail within a few years of the transaction.

3 Important Takeaways About Why Due Diligence is Crucial in any Merger or Acquisition Transaction:

• Representations and warranties provided by the seller are an important part of any M & A transaction.  The buyer must thoroughly review these disclosures, as well as the books, existing customer and employee relationships, the state of the market and the acquisition’s position within that market, recent changes in technology or other developments that may alter past performance, and many other legal and financial aspects of the transaction.
• Due diligence checklists are one of the most effective tools in any M & A transaction.  Your mergers and acquisitions attorney should be able to provide extensive, proven due diligence checklists based upon past successful transactions, as well as their ability to identify potential weaknesses or issues that could alter or threaten the transaction.
• Your M & A attorney(s) must have a “deal making” energy and attitude to preserve the likelihood of success, while working with you to complete due diligence, verify all important factors within the transaction, and ensure associated contracts are custom tailored and thoroughly capture all elements of the transaction at hand.

Mergers and acquisitions are not simply big words used by large corporations and law firms; they are often complex deals that involve extensive preparation, long negotiations and detailed contracts and stock purchase agreement(s) covering everything from executive control to third-party interactions.  Due diligence is the process which ensures all the questions have been asked, all the details have been verified, all the representations and warranties have been thoroughly vetted and all contingent liabilities have been researched and identified.  Having the right professionals on your side can literally make or break the deal.

Why Do Most Mergers and Business Acquisitions Fail?

[We would like to note, for the record, Watkins Firm’s own success rate in literally thousands of M & A client transactions is greater than 75%.  How do we achieve this when national numbers sound so dire?  A thorough mastery of the transaction details, proven exhaustive due diligence checklists, 40+ years of experience, and a “can do!” energy that supports our client’s objectives while ensuring their risks are minimized or remediated altogether.]

Research varies from one source to another, but no matter who you get your information from nationally, anywhere from 50 to 85 percent of mergers and business acquisitions fail.

We simply will not allow our clients to undergo a transaction so fraught with risk and the type of unknowns that damage successful outcomes.  We help to make sure our clients have full visibility into every aspect of the transaction, and protections in place.  Due diligence is crucial in any merger or acquisition, and our proven, proprietary library of checklists and contracts has proven to increase the likelihood of success while completing a successful M & A acquisition.

Success most often comes down to the nitty-gritty details, according to most analysts and our own extensive experience in these transactions.  Most studies conclude:

• Failure to conduct proper due diligence is the primary reason mergers fail.
• Poor financials and accounting preparation
• Loss of business momentum
• debt and post-merger integration problems (getting people from different teams to work together going forward).
• Team integration issues based on incompatible corporate cultures, or physical location that affect a smooth integration of the business(es).
• Overpayment and inaccurate valuation is another of the significant contributors to a future failure, especially in transactions that involve purchase through a combination of cash and stock.
• Hidden financial issues are another common challenge.  Some companies attempt to position themselves with strength when they are actually facing substantial financial and/or legal challenges.

The momentum of a transaction in process itself (the “deal”) and debt can even play a role. Some people are afraid to say what they really think once a deal is underway. We’ve discussed how complex these deals can be; they are expensive as well. When a lot of money has already been spent, it can be difficult for some people not to want to keep the process moving, instead of offsetting risk through the structure of the transaction, or other strategies to correct the trajectory of the acquisition target.

Is it really possible to integrate the operations of two separate entities into an efficient whole?  The failure to develop an effective short and long-term business plan for the acquisition, establish accurate valuation, verify the books, investigate all assets and debts as well as contingent financial and legal liabilities leaves little to no foundation for success going forward.  Lack of a thorough due diligence and integration challenges lead to disgruntled customers, suppliers, employees and ultimately shareholders.

Pro-Tip: “Well, when you have a corporation for a long time, it becomes another person, a citizen, and you get credit for that corporation that corporation can sign leases, that corporation can sign vendor contracts, it can get licenses, it can do all kinds of things that have built up over the years. Whereas if you have a brand new company, you’re guaranteeing everything. So if you want to buy a company that’s already running, you don’t have to renegotiate everything and you just come over with a good shareholder agreement and a stock purchase. You can step into the shoes of a very successful company and work to ensure it makes a profit.

Sellers have tax advantages in selling stock. That’s, that’s always good because a, a stock sale on something you’ve held for a long time, it’s going to be taxed at a better rate. Also it’s a cleaner transaction. You just sell the stock, there’s still going to be due diligence and you still have to make representations and warranties about the company. So it’s still going to be your liability if you’re not honest and truthful, but you definitely would prefer to do a stock sale.

As a deal maker, and that’s what a transaction lawyer is, we want to come up with creative ways to get the deal done while certain contingencies wait, we have had money and trust accounts on deals for two years while a contingency is fulfilled by the seller. So you’ll pay 2 million for a project and there’s $200,000 coming to the company, but it’s not going to come for a while. So the seller will say, ‘well, let’s keep the $200,000 for me in escrow until the benchmarks are met,’ and that $200,000 offsets much of the buyer’s risk, and we get the deal done. Once the money comes in, then the buyer says ‘release the money to the seller’ and everybody’s hapy. It’s a win – win.

What’s the risk from a stock purchase Buyer’s point of view?  If you’re a buyer you want to make sure you are getting what you’re paying for, knowing what you’re getting, have full and accurate disclosure(s), Goodwill, protections to ensure the seller can’t just go off and form another company and compete with you, and ensuring the expertise of the seller is transferred in some manner through the transaction.  Full disclosure, and the buyer’s expertise to fix any issues and hit targets going forward. Those are probably the key things we see in whether companies we help to acquire are successful.” – Dan Watkins, Founding Partner

Due Diligence is Crucial in Any Business Acquisition

This is why due diligence is the crucial in any merger or acquisition in California.  In the broadest sense, the term “due diligence” means that there is a duty to investigate before making a deal or signing contracts.

The Watkins Firm brings 40+ years of experience serving the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California.  We’ve been through literally thousands and thousands of these transactions.  Businesses of every size and scope.

We have developed the processes and checklists necessary to ensure proper due diligence and ultimately a successful outcome for our clients.  We know what questions to ask.  We know virtually every detail to verify.  We know how to work with a team of experts to validate what is in front of us, establish an accurate valuation and help our client(s) to clearly understand what is in front of them.

Just because a company has issues or challenges doesn’t mean they aren’t a good acquisition target.  If you know what they genuinely are and have an accurate “as-is” valuation, then you can develop and implement plans to fix them.  The reason almost two-thirds of mergers and acquisitions fail nationally literally comes down to a lack of a thorough due diligence, and the inability to correct substantial challenges within the target of the acquisition.

Why is our own success rate so high?  How can the Watkins Firm contribute to the success of your merger or acquisition?  We invite you to review our podcast Episode 13 – Mergers and Acquisitions as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.

Meet Dan Watkins:

Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through.  Dan enjoys digging into the facts and finding creative solutions to problems.  He contributes his insights candidly and constructively.

Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.

Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.

He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.

THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR

Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.

In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.