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2 sources of financial loss in a business acquisition

On Behalf of | Mar 18, 2023 | Business Law

The goal of a business acquisition is typically to expand operations and generate revenue. A specific acquisition may occur because the business doing the purchasing wants to obtain a manufacturing facility, specific talent employed by a competitor and/or intellectual property rights. Acquisitions are complicated transactions that often have massive price tags attached. There are many documents required and substantial transitional support for the purchasing organization is needed, in many cases.

Unfortunately, the business purchasing another organization will often learn after the transaction has been completed that there are financial losses ahead instead of just profits. An acquisition can turn into a money-losing nightmare instead of a source of additional revenue. What are two common sources of financial challenges following a business acquisition?

1. A departure of crucial talent

Businesses often have to make difficult decisions after a merger or acquisition because they have redundant talent. They will engage in mass lay-offs and terminations as they combine customer service, sales and human resources teams.

Unfortunately, workers are well aware of that risk and will often leave in droves when a major transition takes place at a business. Companies that don’t plan ahead of time to specifically retain key staff members could find themselves without the engineers or accountants they need to keep the business running. They may also be at a disadvantage when attempting to hire for those positions quickly.

2. An assumption of business liability

Buying a business means taking on its baggage in addition to its assets. The due diligence process before an acquisition should involve looking into the current performance of an organization, the behavior of its workers and numerous other elements.

If employees bring a wage claim or sexual harassment lawsuit against the company later, the business that acquired the original company could be liable for those claims it was involving defective products and contract breaches. The sale of the business usually transfers liability for such issues to the purchasing organization.

Companies could end up losing so much due to these or other post-acquisition challenges that the transaction becomes more harmful than beneficial. Recognizing and planning to avoid the most expensive challenges during a business acquisition can help to minimize the risk assumed by a purchasing organization. A legal professional can clarify and guide businesses accordingly.