The processes and considerations involved in buying a business are more involved than merely identifying the business that meets the potential buyer聮s financial criterion Mike Bercovici College Jersey , making sure that the buyer can make money from it and then determining the purchase price. Buying a business should also involve the identification, assessment and allocation of risk, especially in more complex and high value businesses. These three risk-related processes should occur simultaneously with or very soon after the processes of identifying the business, making sure it could make money for the potential buyer and determining the purchase price.
Depending on the size of the target business and the amount of money involved, a potential buyer should decide whether to conduct the risk analyses James Harden College Jersey , and if so, to what extent. Often times, the value of the business does not justify the expense and energy involved in identifying, assessing and allocating the purchase risks. However, if the value of the business is sufficiently large enough Will Sutton College Jersey , performing these risk identification, assessment and allocation processes can help achieve a better purchase price for the buyer, protect it from unidentifiable or unknown risks andor prevent a bad deal from happening.
The purpose of this article is to explain in general terms the process of identifying, assessing and allocating the risks inherent in purchasing a business from the buyer聮s perspective. This article is not meant to be legal advice. It is meant to give the readers an idea of what is involved in purchasing a business so that the reader can consider the issues raised in this article and ask informed questions about the processes described. Please consult a licensed attorney for your particular situation and transaction.
Identification and Assessment of Risk
Risk identification occurs at the very initial stage of the business buying process, after identification of a good target and an understanding between the buyer and seller that both can proceed with the transaction Pat Tillman College Jersey , subject to certain conditions, such as further investigation. Most often, this process of risk identification is referred to as due diligence. Due Diligence may take the form of financial due diligence or legal due diligence.
Financial due diligence usually involves the participation of an accountant, business broker or other financial advisor who can guide the potential buyer through the financial analysis of the business. It is the process of reviewing the target company聮s financial records and statements to determine whether the economic value and financial performance of the business justifies the asking purchase price. The question should be, 聯is this company really generating the revenues and incurring expenses that the seller is claiming.? Additionally Matthew Bazarevitsch College Jersey , financial due diligence may reveal whether the target聮s financial books and records were properly kept. This consideration is important because the more poorly kept the financial records, the more imprecise the information and thus the more risk that the information is wrong.
If during the financial due diligence process the potential buyer discovers the target actually has only a few number of clients or customers that make up a bulk of its business or that its books were not properly kept or that only a certain number of key employees generate most of the target聮s revenues, then these risks should factor into the purchase price. If these risks are deemed to be substantial enough, then the purchase price should be reduced accordingly. Alternatively, some arrangement should be made between the potential buyer and the seller to factor in these discoveries.
Just as important as financial due diligence is legal due diligence. Legal due diligence is the process of reviewing the target company聮s organizational documents Khaylan Thomas College Jersey , contracts, compliance records, governmental records, and other documents to determine whether the target has complied with applicable laws, is subject to any litigation Isaiah Floyd College Jersey , is exposed to any liability or obligation, and other issues that may affect the structure, terms or feasibility of the transaction. If the potential buyer discovers any adverse information related to any of these matters, the potential buyer may decide, if the information is material enough Frank Darby College Jersey , that the deal should be structured differently, the purchase price should be adjusted andor the risks of liability, non-compliance and other legal exposures should be allocated to the seller. After all, the seller was running the business when the cause of these potential issues were created.
Risk Allocation
Risk allocation is the process of determining who should bear the financial and, some times Casey Tucker College Jersey , legal responsibilities for the occurrence of a certain event (risk), which may or may not happen. The risk allocation process often times is the most contentious and detailed part of the negotiation and drafting process. Risk is usually allocated by way of the operative purchase agreement, most usually in the form of representations and warranties made by the seller and the indemnification mechanisms.