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3 concerning risks that may arise during a business acquisition

On Behalf of | Dec 11, 2023 | Business Law |

A business acquisition can be beneficial for a growing organization. They may purchase a competitor or a company operating in a totally separate industry. So long as a company has the resources to afford an acquisition, there are many potential benefits to doing so.

An acquisition can give a company access to intellectual property, physical facilities and exceptional talent, ranging from engineers and executives to salespeople. Acquisitions are usually a lengthy process, and enthusiastic executives may overlook certain risks while preparing for an acquisition.

What challenges require careful consideration when preparing for a business acquisition?

The loss of employees

An acquisition often creates a large number of redundant positions at a company. The original organization probably already has a sales department, Human Resources professionals and a payroll team. The company will often eliminate certain positions and the professionals that fill them. Workers may preemptively plan an exit from the company to avoid losing their jobs with little warning. It may be necessary to negotiate contracts with workers at the acquiring business and the company it intends to purchase.

The risk of overpayment

All too often, acquiring parties do not perform adequate due diligence regarding the value of the acquired organization. Factors ranging from increasing operating expenses to depreciating equipment values can lead to an overvaluation of the business. Instead of simply accepting an asking price, those preparing for an acquisition often need to do intensive research and propose a different price based on what the company is likely worth and the profits it could potentially generate.

The assumption of liability

When one company purchases another business, the purchaser has to accept certain risks. The liability associated with customer lawsuits or employee wage claims against the company may transfer to the purchaser in many cases. Therefore, is crucial to investigate what liabilities and likely future challenges an organization will face before agreeing to a purchase. It may be possible to reduce the sale price based on potential future liability or to include terms in the purchase agreement that protect the acquiring organization from certain specific risks.

Remaining fastidious and level-headed while preparing for a business acquisition, and seeking legal guidance accordingly, can help reduce the degree of risk involved in this sizable transaction.