Written by Nathan J. Roberts
Conducting a thorough legal, financial and commercial due diligence review is one of the most important steps to take when buying or selling a business (i.e. an M&A transaction).
Having an experienced M&A transaction team on both sides to participate in the due diligence review of the vendors and the target company or assets prior to an M&A transaction will benefit both vendors and purchasers, and can help mitigate or address any complications early in the transaction process.
A thorough legal, financial and commercial due diligence review will also assist transaction teams in appropriately valuing the vendor business, and structuring the purchase and sale transaction.
For purchasers in particular, identifying any potential risks or liabilities is indispensable to properly value the business and to protect the purchaser from unknown risks such as:
- Liens on purchased assets or securities.
- Unpaid taxes of the target company.
- Legal judgments against the target company.
- Ongoing litigation or human rights complaints involving the target company.
- Issues that may prevent the purchaser from obtaining the benefit of material contracts of the target company or assets.
An experienced M&A transaction team will also assist potential vendors by identifying in advance any legal issues or concerns that could affect the transaction, while also maximizing the value of the business for the vendor.
The due diligence process
Ideally, the formal due diligence process will commence following the parties entering into a letter of intent, but prior to any material terms being agreed upon.
During the due diligence process, an M&A transaction team will:
- Review all relevant business records and documents applicable to the business. The scope of the review is typically very broad and encompasses all areas of the business in order to provide the purchaser with a comprehensive understanding of the target company.
- Identify relevant laws and regulations affecting the business and how they may affect the transaction and the operation of the business by the purchaser following closing.
- Search applicable public databases to identify any encumbrances or information about the vendors, the target company or assets that may limit the purchaser’s operation of the business following closing or prevent the purchaser from receiving clear title to the purchased assets or securities at closing of the transaction.
- Conduct a commercial due diligence by reviewing the vendor company’s performance, market share and positioning.
- Compile the results and assist in evaluating the outcome of the due diligence review to assess the impact of any issues that were discovered.
- Assist in resolving issues identified during the due diligence review including the negotiation and inclusion of appropriate terms and conditions in the definitive agreement or in collateral transaction agreements or documents to be entered into by the parties.
- Engage any necessary specialists (internal or external) for appraisal of specialized assets, to conduct a fair market valuation of the company, and/or evaluation of specialized issues such as employment/human resources, tax or real estate.
The documents and records of a business that will be included in the review are generally very broad and will include:
- Financial statements (audited and unaudited).
- Lists of all customers/clients and suppliers.
- List of all major assets and inventory of the business, including equipment and machinery.
- Details of all of the business liabilities and debts.
- Details of all major contracts of the business, including any leases and supply contracts.
- Details of any licenses or permits of the business.
- List of all employees, with relevant information such as salaries and years of service, and details of any employment contracts.
Typically, the prospective purchaser will have a certain period of time following the signing of a letter of intent within which to conduct its due diligence review and decide if it is willing to proceed with the transaction on the terms and conditions agreed to, on amended terms and conditions, or at all. If the prospective purchaser is not satisfied with the results of its due diligence of the vendor company, and the vendor is unable to address the purchaser’s concerns, then the prospective purchaser usually has the right to terminate the contract and is only bound by specific provisions regarding the information it reviewed in the course of the due diligence process, often relating to confidentiality and non-solicitation.
Carscallen LLP’s M&A experience
Carscallen’s team of experienced M&A lawyers can assist both purchasers and vendors in merger and acquisition transactions. We have extensive experience in advising on purchase and sale and business combination transactions for both private and public companies. We can help you understand your options, identify potential issues and how to overcome them, and negotiate the most beneficial terms for your position.
*This update is intended for general information only on the subject matter and is not to be taken as legal advice.