Significance of Contract Due Diligence during Merger & Acquisition

We need to admit that merger with another company brings in uncalled complexities and new sets of problems including transition of thousands of contracts.

Discovery

  • Are you aware that there can be contracts with high legal risk in the other company that may have non-assignment or change of control provisions, which may severely impact the closing of M&A?
  • Do you know that the purchasing party contracts can come with high-level business risk decreasing the value of recently acquired business due to non-compete and other contractual restrictions?
  • How many contracts of the company have transactional risk dues to non-transferable clause and are you mindful of the fact that you may have to serve a notice period for some important transaction?

If organization is negligent in managing contracts transition, it can initiate high risks for the business. Contract due diligence during M&A transactions enables discovery of such legal, business and transactional risks. It also assist the company in eliminating cost overruns and minimize effort by brining in minor changes during due diligence process.

Standard Process

Mentioned below are high-level steps followed by best of the attorneys and advisors during Contract Due Diligence process:

  1. Contract Review to identify important sections
  2. Flagging contractual, business and transactional risks
  3. Presentation of outlining risks and issues

This does not guarantee that there have not been any misses during the process. Fact is a seller wants you to BUY, so s/he will present things with a rose perspective only. Major challenge we face due to such incomplete process is limited resources that lead to loss of time and funds due to administrative tasks.

Existing disconnect between Due Diligence and Contract Lifecycle Management

Organizations typically have an internal team to manage their contracts or a mature CLM processes in place provided by a specialized vendor. While, due diligence activities are either handled by another set of internal or an external attorneys. In any case, contract lifecycle management and due diligence will not be handled by same team which results in major disconnect.

Due diligence team generally do not have access to contract database therefore they may not be able to determine if both the parties have contracts with a same vendor. This needs through analysis and drafting of an addendum or amendment post merger. Inability to identify such duplicate contracts may result in amplifying the cost significantly.

Also, in a typical due diligence activity the contracts of the one company will not be mapped with the standard operating procedures and policies of the other company leading to non-compliance with standard processes.

Our approach to M&A Due Diligence

We believe in leveraging all aspects of contractual options for potential benefits of the transaction and focus on delivering expected benefits by brining in better quality of operations. To achieve maximum cost reduction and to know the actual cost of ownership it is important to reveal all the post-closing contractual issues before the merger ends. To prevent the heartache down the road we strongly recommend contract integration with due diligence, which will reveal the good, and the bad sides of the same coin.

Our SMEs with proven experience recommend to perform ‘gap analysis’ in order to map the metadata and identify the material difference between both the companies contracting standards. Metadata in this context includes the data related to a particular contract. ‘Gap analysis’ also includes two-tired review process; structure and escalate issues based on severity and likelihood of occurrence; ascertain ‘non-conforming’ contracts and non-standard clause language; and need basis reviews for time-sensitive matters.

This process provides the roadmap to the Company as the contractual risks are identified and they have a clear visibility of the contracts that needs amendment post transaction. Additionally, it will ease the activity of mapping the metadata of both the companies to provide consistency in the Company’s contract lifecycle management system.

Following our recommended solution to perform pre-transaction contract due diligence the Company can avoid the double cost of two different teams for reviewing the contracts and by the end of transaction the Company would have a robust contract lifecycle system. With such improved contract lifecycle management the Company can boost the bottom line of the transaction with 10-15%.

Other benefits:

  • Easily identify unreliable vendors.
  • Contractual awareness and easy access supports your sales and marketing department to boost the revenue and drastically cut down unpredictable costs.
  • Digital contract repository.
  • Better reporting quality, greater transparencies, tighter spend monitoring leads to quick identification of savings opportunities.
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