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The role of liability when planning an acquisition

On Behalf of | May 11, 2023 | Business Acquisition & Financing

Many business considerations can lead to one organization acquiring another. Perhaps a newcomer in the industry has a patented process or a very compelling brand that makes it attractive to an established player in the same market. Maybe one company has excellent manufacturing facilities or the best talent in the area. It might even just be the delay required to grow to meet customer demand without tapping into existing resources that renders an acquisition a good option for a company.

There are many reasons that one organization may decide that it could benefit from acquiring another company. Acquisitions often lead to rapid growth, but they can sometimes lead to significant setbacks for an organization that is acquiring another company. One common oversight can make an acquisition a source of more risk than profit.

Acquiring a business means taking on its liability

Before committing to a merger or acquisition of any type, owners and executives at a company need to perform their due diligence. Due diligence means looking into a company’s operations, assets, liabilities and employee roster to establish what the company is really worth and what risks the business making the purchase might have to take on as part of the transaction.

The delivery of defective products to consumers in the past or the decision by management to ignore complaints about discrimination or harassment could lead to legal and financial liability for the company that makes the purchase. Those in an ownership or executive position at a company in a vulnerable position may not always be forthcoming with the details of prior failures or issues that could lead to financial claims in the future.

Therefore, it is of the utmost importance that those considering an acquisition understand the culture and challenges at the other company to minimize risk. The amount of money involved in a business acquisition and the massive transfer of ownership interests and financial responsibilities that occur make it a very dangerous process, especially for the company doing the purchasing.

Only with proper research and thoughtful consideration can growing organizations minimize the risks involved in expanding via acquisition. Having sound legal guidance while preparing for large business transactions can take some of the risks out of the process.