Are you going to enter into a new merger or acquisition deal? Have you gone through a due diligence process? Have you checked in all the boxes, before going to finalize the deal? If no, then you can be in a big trouble in near future. Read this article to know complete details about the due diligence process that needs to be done by you before finalizing to sign a deal or not.
A complete Due Diligence process lets a potential buyer or investor learn more about an organization in order to finalize an investment. Due diligence is a crucial step for any major transaction or investment and is more important in the context of the mergers and acquisitions (M&A). Whether you are a buyer or seller, it is important for you to know exactly what information will need to be investigated before a deal can be finalized. In order to organize this information, (M&A) Mergers & Acquisitions attorneys create and research a comprehensive due diligence checklist before structuring a deal. If a seller wishes, a Priori lawyer can assist him to negotiate a comprehensive M&A due diligence checklist and to organize the materials.
Table of Contents
What is the Due Diligence?
Due diligence is a comprehensive appraisal of a business that a potential buyer or investor usually undertakes before buying a company or deciding to make an investment in a company. As a buyer or investor, during due diligence process, your attorney will review the assets and liabilities, structure, operations and key business relationships of the target company. This information lets you effectively evaluate the strategic commercial potential of the deal and ensure that the merger or acquisition is priced correctly with accuracy. As a seller or company owner, your lawyer will not only help you to provide the required documents to the buyer or investor but also help manage the process so that you can continue to carry on with your business and not be deluged by document requests.
Key Considerations to Put on Your Due Diligence Checklist
Every Merger & Acquisition deal is unique and the depth of due diligence needed on a specific topic will vary depending on the company, its profile, related environment and the dynamics of the deal. Still, there are certain due diligence matters that are generally included in transactions, which are hereby mentioned :
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Corporate Structure & General Matters
To ensure that everything is in order, corporate attorneys very carefully review the corporate structure, capitalization, organizational documents and general corporate records of the company. Some of the documents typically reviewed include Incorporation documents, Corporate Bylaws, Organizational chart, Lists of all securities holders, Stock option agreements and plans, Stockholder and voting agreements, Warranties, Stock appreciation rights plans and related grants, Recapitalization or restructuring documents, Minutes from all board, shareholder, and/or executive committee meetings since charter, and Agreements related to any sales or purchases of businesses.
Corporate attorneys generally review all the financial information (of the last five years) of the company, including income statements, balance sheets, cash flow and audit reports. Other financial documents that may be reviewed by the corporate attorney include projections, budgets, and forecasts for the financials of the next 5 years and assess whether they are reasonable or not. Finally, corporate attorneys usually review all the credit agreements, debts and contingent liabilities of the company.
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Taxes
Tax due diligence reviews historical income tax liabilities (if any) and provides an analysis of any tax carryforwards and their potential benefits. Corporate lawyers review and verify that taxes are current in all jurisdictions and confirm that there are no unexpected tax issues. Documents generally reviewed for tax due diligence include Federal, state, local, and foreign income, sales, and other tax returns filed in the last 5 years; Correspondence or notice from any foreign, federal, state, or local tax authority; Government audits; Tax sharing and transfer pricing agreements; Net operating losses or credit carryforwards; Settlement documents with the IRS or other tax authorities; and IRS Form 5500 for 401(k) plans.
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Strategic Fit
In any Merger & Acquisition transaction, future performance and strategic fit can be as important as any current profitability. As a potential buyer, a key business diligence point is exploring and inspecting the extent to which the company will fit strategically within your current business or how you will be able to work together in the coming future. This exploring task includes considerations of human resources, integration, and transition, marginal costs, technology and general work culture.
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Intellectual Property
An intellectual property lawyer can assist you in establishing the extent and quality of the technology and intellectual property of the potential company, as well as its protection. The Intellectual Property lawyer typically reviews all the Patents, Copyrights, Trademarks, Domain names, Trade secrets, Licenses and licensing agreements, IP litigation, and claims, and Liens or encumbrances on the intellectual property of the company.
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Material Assets
Generally, the material assets of the company are crucial to the Merger & Acquisition transactions. It is important to consider the total value of all the assets and any debts or liabilities against them before any merger and acquisition. Usually, the assets appraised are the real estate, Inventory stock, Equipment, Technology; and Research and development.
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Contracts
A corporate lawyer reviews all the material contracts and commitments of the target company. Reviewing contracts is one of the most critical and time-consuming parts of due diligence. A corporate attorney usually reviews all of the contracts currently in force that involve the target company, including Customer and supplier contracts, Schedule of accounts receivable and payable, Guaranties, loans and credit agreements, Agreements of partnership or joint venture, Equipment leases, Settlement agreements, Non-compete, most favored nation and exclusivity agreements, License agreements, franchising agreements, employment contracts and Distribution, dealer, sales agency or advertising agreements.
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Employees and Management
For understanding the value of a company, its employees may or may not be a key resource in a merger or acquisition, but understanding the quality and structure of the management and employee base of the company is absolutely important.
An employment lawyer usually reviews all the employee contracts, benefits, and policies. Buyers also often seek to understand which employees should remain with the company after the transaction of merger and acquisition, as well as any past employee issues or emerging future problems.
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Litigation
It is important to know if the deal of merger or acquisition will include any potential legal liabilities. That’s why a litigation lawyer reviews any pending, threatened or settled litigation, arbitration or regulatory proceedings involving the target company.
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Compliance and Regulatory Matters
Attorneys review regulatory and compliance issues involving the target company and the deal of merger and acquisition in general. In particular, lawyers nearly always assess the anti-trust implications of the proposed m&a transaction.
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Insurance
In any acquisition, the buyer or investor will want to undertake a review of key insurance policies of the business of the target company including the extent of self-insurance arrangements (if applicable), General liability insurance, D&O insurance, Intellectual property insurance, Car insurance, Health insurance, E&O insurance, Keyman insurance, Employee liability insurance, Worker’s compensation insurance and Umbrella policies.
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Production-Related Matters
Depending on the nature of the business of the target company, the buyer undertakes a review of the production-related matters of the company, including the under-mentioned:
- List of the company’s most significant subcontractors, including the dollar volume of business and the type of services or products supplied by each subcontractor
- List of the company’s largest suppliers with the amount and type of products purchased from each during the most recent fiscal years and year-to-date, as well as whether or not the supplier is the sole source of such products
- Monthly manufacturing yield summaries, by product
- Schedule of backlog showing customers, products, and requested/scheduled shipping dates
- Copies of inventory reports
- Supplies or materials used by the company to produce or develop products that are in short supply or subject to shortages
- Product service programs and copies of the standard form of the service contract and any contracts with service providers
- Information regarding backlogs and levels of plant operation
- All agreements and other arrangements related to the research, development, manufacturing, and testing of the company’s products
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Marketing Arrangements
As part of diligence, the buyer will undertake to understand the marketing strategies and arrangements of the target company including thorough reviewing of the points under-mentioned:
- Sales representative, distributor, agency, and franchise agreements of the company
- Standard company sales forms or literature, including price lists, catalogs, purchase orders, etc.
- All other agreements related to the marketing of the company’s products
- Surveys of the markets, the company serves or plans to serve, whether or not compiled by or at the direction of the company
- Press releases concerning the company (or any partnership or joint venture involving the company or any subsidiary)
Priori Pricing
Depending upon the type of deal to be signed between two parties, pricing can vary widely. When you hire a lawyer in the Priori network, hourly rates for this type of transaction typically start at $225 per hour but this range can significantly go up based on certain types of experience attained by lawyers.
Note:
This is not a comprehensive due diligence checklist. A due diligence checklist should be exhaustive so that you do not have to face a new surprise while signing the Merger & Acquisition deal. When you enter into such a deal, hire an attorney who will be able to create a comprehensive due diligence checklist that you can work through together. This will ensure that you have all the information beforehand that you need for finalizing any agreement.