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What due diligence should be done before a merger?

Before your company completes a merger in California, you will need to do your due diligence. Inc. explains that this type of detailed examination of a company you are thinking of merging with should reveal its past operations, as well as its future prospects.

The investigation you conduct should include a close scrutiny of the following records:

  • Financial statements
  • Inventories
  • Taxes
  • Accounts receivable
  • Intellectual property rights
  • Employment policies, workers' compensation and employee benefits

The company may also have compliance matters to assess, such as those involving ordinances, regulations, environmental practices and executive personnel conduct. In addition, your analysis should involve pending lawsuits or potential reasons for future litigation.

Even if you complete your due diligence and find that the company has no serious issues that would cause problems for you after a merger, you still have at least some level of risk, however small. Many companies have chosen to purchase a type of liability insurance called representations and warranties liability insurance. If your business is hurt because the other company engaged in a wrongful act, you may recoup your losses through a claim. 

Once your investigation is complete and you have ensured your safety net, you still have some due diligence to take care of. Experts recommend doing a self-analysis before merging with another corporation. The purpose of this analysis is to determine whether your company and the new company will truly create a new entity that is greater in itself than either company was on its own. 

This general information about due diligence is provided for educational purposes, but it should not be interpreted as legal advice.

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