Corporate Finance

Consider key factors in early stages of acquisition

When it comes to avoiding buyer’s remorse in an acquisition, it’s important to give early consideration to both the tangible and intangible aspects of the purchase of the business, says Toronto corporate lawyer Chaim Sapirman.

“It’s helpful for a client to step back before they get lost in the nitty-gritty of the headings and subheadings of due diligence and appreciate the broader impact and purpose of what the buyer is hoping to do,” says Sapirman, a partner with Torkin Manes LLP.

If a company has not been through the purchase of another business before, the owners can get caught up in wanting to move ahead quickly, but it’s essential to take into account all the factors at play.

“I tell clients it’s kind of like getting a research assignment, and there is an objective — to dig deep into what you’re buying to ensure this is a transaction you really want to complete,” Sapirman tells “You want to uncover any risks and make sure this acquisition is a good fit for how you intend to operate the acquired business, and it is well-suited for integration into the existing business.”

In terms of what elements of due diligence you should initially focus on, Sapirman says he sees it as two broad headings — one is the more tangible side of the business, while the other includes intangible factors including market forces.

“The tangible side is the typical financial statements, legal contracts, the details of who their employees, customers and suppliers are, their operations, and all the other similar pertinent information — basically the nuts and bolts of the target business,” Sapirman explains.

Carefully assessing those aspects of the prospective acquisition will serve to confirm the valuation being placed on the target as well as support the purchase price you’re willing to pay, he says.

“It will also identify any risks or concerns that may be inherent in the business that could result in a decision not to proceed, or at least help to make you fully understand the risk or challenge in the target that will be there when the transaction proceeds,” Sapirman says.

The intangible side of due diligence, going beyond the financial statements, legal contracts etc., involves taking a good look at who the seller and target business is, and should include consideration of questions such as: How long have they operated the business? What is their motivation to sell? Have they shopped the company around before? How long have they been pursuing an exit strategy?

“It’s vital to reflect on your gut sense of the seller — it’s about assessing the personal credibility of the individuals, but also the business as a whole,” says Sapirman.

It is also critical to understand who the competition is and the various market forces involved, he says. Is it in an industry that is struggling with some new piece of legislation or incident that occurred in the broader world that has resulted in some challenges for the company?

“That’s what I see as the intangible side of the process that a buyer is going to have to go through,” says Sapirman.

These are some of the reasons why it is important to engage advisers early in the acquisition process before the parties get too deep into making the deal, he says.

“Very sophisticated buyers have teams that do this kind of due diligence, so they may only need to engage outside accountants or lawyers,” Sapirman says. “However, if you are new to the process, your team should be assembled as soon as possible — the longer you wait, the harder it becomes to extricate yourself from a deal.”

While lawyers don’t typically get involved in the details of a valuation, they should be part of discussions around the structure of a deal.

“That would involve questions such as: Is it going to be a sale of assets or a sale of shares? Is there an earn-out component to the purchase price? Are there employment agreements or leases? Are there stock option plans that have to be wound up, what’s the cost of that, and who is going to pay for it? Is there any debt? All of that really forms part of the structure,” says Sapirman.

Similarly, there is also a question around whether a management team is staying on after the acquisition, which may require a level of due diligence in terms of getting to know who those people are, he says. In many cases, the sellers will make certain demands for the existing employees in order to ensure that their people are taken care of.

“Those interactions with key management can be crucial. Sometimes buyers have new management teams, but it really depends on the context of the deal,” says Sapirman.

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