DUE DILIGENCE — words that make nearly every junior corporate associate in “big law” quake!
Due diligence is a tedious and time-consuming process. Yet, it is a valuable, important and necessary component in every Merger & Acquisition transaction (M&A).
The due diligence process requires someone with (i) a reasonable understanding of the target company’s business, and (ii) a working knowledge of the legal issues relating to the particular deal and the industry in general, to read and summarize endless stacks of legal, operational and other documents relating to the target company’s
- financial statements;
- human resources;
- intellectual and real property;
- threatened and pending litigation;
- products and services; and
- customers, suppliers, and partners.
The question becomes: What to do with the 10–100-page memorandum prepared by the junior attorney, summarizing the inner workings of the company being purchased?
I’ve often thought junior associates would be more enthusiastic about their role in the due diligence process if they fully understood how a well-organized summary of the due diligence is used to inform the writing of the purchase contract. By unearthing certain business skeletons early on in the process, the buyer’s attorney can protect her client by ensuring that pre-closing liabilities remain with the seller. Most often this is accomplished by including targeted representations, warranties, covenants (agreements), special indemnity provisions, restrictions from liability, and other exclusions in the purchase contract, which drill down on known and unknown pre-closing liabilities.
As junior associates get more directly involved in drafting purchase agreements, they begin to see firsthand the more practical implications of the due diligence process, such as:
- Validating representations made by the seller
- Evaluating risk tolerance levels
- Identifying known and unknown liabilities
- Developing practical plans for creating synergies between the two companies
- Facilitating the integration process
Let’s Focus on Liabilities
Effective due diligence benefits both buyers and sellers.
From the perspective of the buyer, the seller’s pre-closing liabilities can be used to justify a purchase price reduction, an increase in the amount of an escrow holdback, or even killing an ill-advised deal altogether.
From the perspective of the seller, advanced planning for the due diligence process can result in tremendous benefits, such as maximizing valuation, minimizing escrows and other holdbacks from the purchase price, shortening the due diligence period, reducing disruption to the target company’s business caused by the sale, enhancing the seller’s credibility in the buyer’s eyes, and presenting information in a manner that accelerates and improves company integration after closing.
An experienced M&A law firm, such as Aimee B. Davis Law P.C., well versed in the interplay between buyer’s and seller’s interests, is best suited to conduct and leverage a thorough due diligence review of the target company. This review adds value to every M&A transaction, whether the client is the buyer or the seller.
Aimee B. Davis Law P.C. is committed to advising its clients and resolving issues relating to the legal and business matters that are important to them. If you have any questions, please feel free to contact us at (917) 617-2243 or email firstname.lastname@example.org.