Finances
The financial health of a company is the number one concern of a potential buyer. The selling company should provide the seller with audited financial statements for the last three years, a schedule of inventory, a schedule of accounts receivable, a schedule of accounts payable, a schedule of indebtedness and contingent liabilities, an analysis of fixed and variable expenses and a copy of the company general ledger (FindLaw, 2005). The analysis of the accounts payable and accounts receivable of a business is essential. Accounts payable are the bills that are unpaid by a business. Accounts receivable are the unpaid customer bills and any other money owed to the company. The health of a company depends on revenue. The accounts receivable of Five Friends Construction must be higher than the accounts payable. This shows an ability to keep general expenses down while keeping revenue flowing into the companies back account. The higher the accounts receivable the more financially stable a company is currently and will be in the future.
Employees
Employees are often a company’s most important asset. The understanding of each employee as well as trends among a group of employees must be addressed before acquiring Five Friends Construction. A list of all current and former employees including positions, current salaries and bonuses paid during the last three years, a copy of the personal handbook and a schedule of employee holiday, vacation and sick leave policies, descriptions of all retirement plans, copies of collective bargaining agreements, a description of employee problems over the last three years, including wrongful termination, harassment and discrimination cases are all key parts of assessing a company when deciding to purchase (FindLaw, 2005).
The history of discrimination and lawsuits surrounding this history need to be considered when purchasing Five Friends Construction. In the employment context the right of equal protection limits the power of the state and federal governments to discriminate in their employment practices by treating employees, former employees, or job applicants unequally because of membership in a group (such as a race or sex). Due process protection requires that employees have a fair procedural process before they are terminated if the termination is related to a "liberty" (such as the right to free speech) or property interest. State constitutions may also afford protection from employment discrimination (Legal Information Institute, 2005). The above directly relates to governmental bodies. However, federal and state statutes have regulated the private sector similarly to the governmental bodies, to the point where if there is any history of discrimination it may not be beneficial to purchase a company.
Environment
Construction companies are notorious for legal risks arising from environmental law. The due diligence checklist must include, environmental audits for all construction sites, a list of hazardous substances used by the company, a description of disposal methods, a list of environmental permits and licenses, copies of all correspondence between the company and the Environmental Protection Agency, any pending or past litigation regarding the environment (FindLaw, 2005). Businesses that comply with environmental laws and land use regulations are likely to avoid exposure to liability for toxic torts. Some business owners are so concerned over potential liability that their environmental concerns may make or break deals. The laws regulate numerous activities ranging from the handling of dangerous chemicals and the disposal of toxic waste to the building of new facilities and the rights of workers to know which chemicals are present in the workplace (Guide to Florida Law, 2005). Avoiding cases such as Plaintiff v. Asbestos Manufacturers, Distributors and Insulation Contractors, State Court of Fulton County, Georgia (5/31/99) where 4.1 million dollars was awarded to the plaintiff, are the reason assessing environmental risk is important before purchasing a business.
Litigation
In addition to the above mentioned legal risks, all exposures due to litigation should be reviewed. Most cases that are settled in court have the potential for enormous payouts. One of these payouts could easily put a small company such as Five Friends Construction in financial peril. Included in the due diligence checklist to asses legal liability must be the following:
- A schedule of all pending litigation.
- A description of any threatened litigation.
- Copies of insurance policies possibly providing coverage as to pending or threatened litigation.
- Documents relating to any injunctions, consent decrees, or settlements to which the Company is a party.
- A list of unsatisfied judgments (FindLaw, 2005).
By looking at all exposure and potential litigation, not just environmental and employee related risk, a purchasing company can reduce their liability exposure if they decide to purchase the company. If any of the above issues arise, the purchasing company may want to wait until the litigation has passed to determine whether to purchase.
Conclusion
A due diligence checklist is a long and tedious process. It may cost thousands of dollars to complete a comprehensive assessment of risk and issues affecting a particular company. By completing one effectively, a company has a cost benefit analysis of whether the company they are going to purchase has a legitimate future for profitability. The identification of success related to a cost benefit analysis is simple. If the results of the due diligence checklist are positive and the benefits outweigh the costs, purchasing Five Friends Construction is recommended. If the costs are too much, waiting for another opportunity is always an option. Whichever is the case, the creation of a due diligence checklist will avoid major problems when issues and risks arise and provide the ability to decision makers to realize if the company to purchase is a sound investment.
References
FindLaw (2005). Due Diligence Checklist-Purchasing a Business. Retrieved October 23, 2005, from http://smallbusiness.findlaw.com/business-forms-contracts/be3_8_1.html
Global Law Review (2005). Legal Due Diligence. Retrieved October 23, 2005, from http://www.globallawreview.com/legaldd.html
Guide to Florida Law (2005). Florida Land Use & Environmental Law. Retrieved October 23, 2005, from http://www.weblocator.com/attorney/fl/law/land.html
Legal Information Institute (2005). Employment Discrimination: an overview. Retrieved October 23, 2005, from http://www.law.cornell.edu/topics/employment_discrimination.html
