This article was originally published in the GrowthBusiness M&A Guide.
The M&A Guide is aimed at entrepreneurs and owners of growth companies, summarising the state of play of the dealmaking landscape and the various elements of the ecosystem over the past year. The aim is to help business owners understand whether a merger, acquisition, sale, or going public is right for their business, and the types of advisers and expertise they may require along the way.
Are you ready for due diligence?
Whether you’re looking to raise external finance or sell your business, the importance of thorough preparation for the legal due diligence process cannot be overstated. One of the most common reasons we see deals delayed or abandoned, or buyers attempting to price-chip, is because owners are not ready for the scale (both in breadth and depth) of a buyer’s investigations into their business. Recent developments in the approach law firms take to legal due diligence will only exacerbate this, unless you get ahead of the game.
No two buyers, whether private equity or trade, have the exact same due diligence requirements. However, taking a reactive approach to their specific requests can add weeks, and even months, to the timetable (especially if you hope to run a successful auction involving a number of competing bidders, each with their own lawyers looking for answers). Getting organised early puts you in the best position to reject calls for the common demands that buyers make in the transaction documents. These buyers tend to add demands if they feel their ability to conduct full due diligence has been hampered, for example, by excessive contractual warranties and indemnities or cash-escrow arrangements. This can bolster a buyer’s confidence in management’s abilities.
Businesses of all shapes and sizes face problems here. Even if you’ve been able to retain full control and visibility of your legal affairs, the time commitment required during the process can be massive and invariably takes you away from running the business. Larger businesses, or those with overseas offices, typically delegate responsibilities across the areas likely to be investigated by the lawyers so the whole management team needs to be ready. Contracts in foreign languages (or overseas managers having responsibility for local law compliance, for example) can further complicate your ability to know exactly where any problem areas may lie.
So what can you do to get yourself ready and to minimise the pain?
Get up to date
When were your standard terms of business, employment contracts and constitutional documents (just to pick three common examples) last checked for compliance with current legal requirements and best practice? Clients increasingly expect their lawyers to share advice on more than just key areas of risk or liability, such as the work needed to make a company “shipshape” or to simplify post-deal integration. More recent focus areas for lawyers, such as anti-bribery and corruption, equal pay and modern slavery, are frequently those where SMEs can easily fall behind on current expectations.
Get the paperwork straight
Can you easily lay your hands on the most recent versions of customer contracts? Are they all signed? Are all of your statutory registers properly maintained and have all filings been made? Are all IP rights properly registered? Are employee entitlements under option arrangements clear? Individually, these items may not be seen as an insurmountable problems to a buyer but they quickly add up and require substantial time and effort for a buyer to put right post-deal.
Create a comprehensive virtual “data room”
The days of lawyers reviewing only the most “material” documents are fading. Buyers’ increased desire to minimise risk has aligned with leading law firms starting to use automated contract review technology to process and analyse huge amounts of data in ways (and at speeds) that previously weren’t possible. The next few years will likely see this becoming the standard approach on deals as more law firms take a similar approach. Only providing a sample of contracts for manual review by junior lawyers may well not be enough anymore to get the deal done.
Get the due diligence done yourself
Many owners choose to take the lead in the process, asking their lawyers to conduct a pre-sale due diligence review (commonly known as “vendor due diligence”). This is a well-established approach in tackling the financial and tax due diligence but it has, historically, been used more sparingly for the legal process despite the benefits it brings there too. While there’s an upfront cost to this, it ensures potential issues can be identified and fixed before a buyer’s investigations start. It also puts you in the driving seat for the whole process, both of which can substantially reduce costs at a later stage.
While these are only a handful of tips, the underlying theme here is organisation. Getting ready early helps free up the time required to focus on delivering the business plan. And that’s where you’re needed.
Richard Wood is the head of legal due diligence services at PwC, Corporate Legal team.