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3 hazards to look for during the due diligence phase of a merger

On Behalf of | Apr 3, 2024 | Business Transactions

Business mergers are expensive but potentially lucrative endeavors. The companies combining their operations share talent and intellectual property, such as trade secrets and patents. The resulting business May have a larger overall share of the market, allowing for much more rapid expansion than either company could potentially achieve on its own.

The downside of a merger is that a business has to accept liability as well as benefits. Therefore, the due diligence process is extremely important to the leadership at organizations contemplating a merger. The following issues, in particular, require investigation to protect an organization from unwanted liability.

Issues with products or services

While a company may seemingly have a solid reputation, reputations can change overnight. An adjustment to production practices or a bad hiring decision could lead to numerous complaints against a company. Organizations preparing for a merger therefore need to look into whether the other company has recently changed its business practices or had issues with customers and clients. Those concerns might lead to lawsuits against the newly-merged organization that could prove financially devastating.

Issues with employees

Workers experiencing discrimination or harassment on the job usually cannot take legal action instantaneously. It takes months of cooperation with specialized attorneys to prepare to file a lawsuit. Leadership at one organization may need to communicate with current and former employees of the other business to understand the culture of that organization and rule out the possibility of employee lawsuits. Any liability from either company could become an issue for the merged organization after the transaction.

Expiring intellectual property protections

Copyrights and patents are not permanent forms of protection. They eventually expire, allowing other businesses to use previously protected works or ideas. Especially when a merger occurs in part to gain access to valuable intellectual property, ensuring that those protections remain in place after the organizations merge is of the utmost importance.

It can be very challenging for those trying to run a business to also thoroughly investigate another company. Acquiring appropriate support while preparing for a merger or other major business transaction can help eliminate some of the research and risk inherent in the process.