M&A Video Series:
PREPARING A COMPANY FOR THE M&A PROCESS | MAINTAINING BARGAINING POWER DURING THE M&A PROCESS
CEO'S IMPORTANT ROLE IN THE M&A PROCESS | DUE DILIGENCE DURING THE M&A PROCESS
Due Diligence During the M&A Process
George P. Shenas, Esq. hosts Marcus H. Klebe, Esq.
Part I: Information as Currency - Why a Seller Short-changes Due Diligence at its own Peril
George asks Marcus about the importance of due diligence in M&A transactions, and Marcus begins by defining “due diligence” and then explaining how undertaking a systematic review of one’s own enterprise gives a seller leverage during subsequent negotiations. Marcus and George encourage the full and honest disclosure of facts, even unfavorable ones, as part of the process – the key is placing all facts in their proper context, and painting a comprehensive picture of the enterprise that will hold up under close scrutiny and yet secure the highest possible purchase price. Marcus emphasizes the need to maintain the buyer’s confidence throughout the due diligence process, because trust is an essential component to speedy and mutually-favorable negotiations. George and Marcus agree that any financial or other projections relayed by the seller at the outset of the M&A negotiations must be met, or preferably exceeded, during the weeks and months leading up to closing in order to avoid the risk of significant price erosion.
Part II: Managing the M&A Process before the Process Manages You – Assembling the Data Room
George engages Marcus in a detailed discussion of the use of virtual and physical data rooms to facilitate sophisticated M&A transactions. Marcus describes the nuts and bolts of the M&A due diligence process, specifically describing the way the Shenas firm organizes information and manages disclosure of that information to the seller. George asks Marcus to explain why it might be in a company’s interest to compile the same information before even engaging in formal merger discussions with a third party. To illustrate better the practical application of due diligence principles, Marcus, speaking from experience, gives several concrete examples involving three different subject areas: intellectual property, material contracts, and financial data. By the time a seller gets to the stage of actually negotiating the purchase agreement, the parties have largely formalized their relative positions; accordingly, a savvy seller can stake out a much more favorable position as the formal document begins to take shape by understanding these due diligence principles and working with legal counsel from the very beginning. George emphasizes that a company’s financial data should be presented in a way that comports with industry-wide best practices, including compliance with accounting standards that are defensible when scrutinized by a buyer and their advisors. For a copy of the due diligence checklist referenced in the video, please click here.
Part III: The Law Firm's Critical M&A Role in Reducing the Seller's Exposure to Liability
George asks Marcus to describe, in concrete terms, the way that facts and circumstances which are revealed as a part of the due diligence process make their way into the definitive purchase agreement. Marcus explains the representation and warranties section of the purchase agreement, starting with a definition of “representation and warranties,” generally. George and Marcus discuss practical ways to reduce the overall exposure to liability on the part of the seller either on the closing date or after the transaction has fully consummated, including the use of qualifiers to the representations and warranties or the use of survival periods. The discussion concludes with advice gleaned from many successful M&A transactions: playing ‘hide and seek’ during the due diligence process doesn’t work – an honest, transparent and complete representation of the company’s condition, one which nevertheless aggressively presents the seller’s point of view, best preserves enterprise value and resists post-closing disputes. Good legal counsel is therefore critical to obtaining the right purchase price from the seller’s perspective.