What Does My Company Need To Know Before Acquiring Another Company In Financial Distress?

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We have been asked many times to assist a client in the purchase of another business that has been experiencing financial difficulties. While the purchase can be a significant advantage to your company, there are several items to keep in mind before contemplating such a transaction.

  • Due Diligence—Spend the time, effort, and money to thoroughly review financial information, employment contracts, leases, the work in progress of the company, etc. to obtain as full a picture of the financial position of the company before you complete the transaction.
  • Transaction Team—Enlist key employees and outside professionals to assist in the analysis and interpretation of all information gathered.  Use in-house staff, when possible, as well as engaging outside entities with certain levels of needed expertise (i.e.: forensic accountants, real property and business appraisers, environmental analysts, etc.).
  • Assets free and clear of liens—Often, the target company had loans with a financial institution that has liens on some or all of the assets of the company, and/or personal guarantees of insiders.  Review whether the personal guarantee stays with them or has to be transferred to the purchaser.  Be sure to perform UCC searches to examine any judicial liens, judgments, or any type of tax  liens, that may be in place.  You must obtain releases from all secured parties before completing the transaction.
 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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