Buying a Company & Defensive Due Diligence
Due diligence for a business buyout or asset acquisition is a process that usually begins after signing a letter of intent (LOI) which sets forth the parties’ desire to buy and sell a company or assets. Many people use the term ‘due diligence’ loosely, but it is a process that should be structured and conducted in a controlled and disciplined way.
Defensive due diligence is a process that identifies risks a purchaser can face as a result of the temporary acquisition of the intellectual property and confidential information of a party that is selling a business or assets. If a buyer is not cautious, structured, and disciplined in the process, he can accidentally exposed himself to liabilities and claims that can form the basis of a lawsuit, making it important to consult a Texas business lawyer to structure due diligence before negotiating a business buyout or asset acquisition.
Due Diligence Information Risks & Liabilities
When purchasing a business or assets, due diligence is largely oriented around discovering info about the seller’s property, contracts, business processes, intellectual property, and technology, which often includes a large amount of trade secrets and confidential information.
Knowledge is power for a buyer, but it can also be a liability — especially if the buyer decides not to make the purchase after conducting due diligence. In that case, the seller may be suspicious that the buyer just wanted to acquire its proprietary information for an improper purpose. And even if the buyer didn’t have any improper motives, it’s possible for the buyer to accidentally misappropriate trade secrets or to negligently expose the information to theft or misappropriation by other parties.
How to Structure Defensive Due Diligence
Define the essential goals of the business acquisition. Defining the business buyout goals will help you limit the scope of the documentation you want to request for review. It will also help limit the scope of the defensive preliminary work you will need to perform before beginning due diligence.
Define the scope of the due diligence information you will request. You should also define the purpose and use that the requested information will contribute to your due diligence evaluation, as this will create a preliminary plan for your due diligence process. If you don’t have a good use or purpose for a particular piece of information, don’t request it.
Buyer should document all of its existing intellectual property. Specifically, buyer should record all of its own past and current works similar to or relating to the services or products of the acquisition target and info you request from the acquisition target. A Texas business attorney can help you prepare documents that can be valuable evidence at a later time, if there is a claim or lawsuit for willful misappropriation of confidential information.
Data Security & Confidentiality of Information
In addition to limiting the scope of the due diligence information requested, you should also ensure your business lawyer has a defined method and plan for holding, transferring, and communicating the due diligence information with team members. The due diligence team usually involves the business buyers, their CPA, a business attorney, and other industry-specific expert consultants. It’s important to make sure that these members can communicate with each other, and to also ensure that due diligence information cannot leak out of the hands of the team. Finally, at the end of the process, it’s important to make sure that all information can be located and destroyed when needed.
Every step of buying a business should be taken with a strategic business plan. A carefully engineered letter of intent and due diligence plan are indispensable components of your business acquisition strategy that will help ensure your success and reduce your liabilities. Our Austin business law firm regularly counsels clients who are buying and selling a business or assets of a company. Contact a business lawyer in Austin to discuss your business buyout or asset acquisition with experienced business counsel.