Due Diligence in Mergers & Acquisitions

Posted by: Marcin Durlak
Posted in: Corporate solutions
Date published: 06/07/2022

When a merger or acquisition (M&A) is announced, it is not always apparent just how much time and commitment was required from both companies to get the deal over the line. Corporate lawyers say M&A hard work starts with identifying the right company to explore M&A opportunities with. That is followed by due diligence to ensure the merger is the best move for your company so you know what you are acquiring and that the deal is on the right terms.

In this article we look at the basics of due diligence in M&As and how to streamline and manage the process to ensure your company M&A plans proceed as smoothly as possible.

What is due diligence in an M&A?

Legal due diligence in M&As is checking your purchase before you commit. It is a crucial part of any purchase; whether you are buying a commercial property, investing in software, or buying a company.

When a business acquires another company, checking the deal is essential for both the seller and the purchaser as due diligence should ensure:

The price is accurate and reasonable for what is being acquired
The transaction is structured efficiently
Potential liabilities and opportunities are understood
Warranties and indemnities are drafted to ensure the buyer has adequate safeguards but do not overexpose the seller to post M&A litigation risk

The importance of due diligence

From a buyer or target’s perspective, due diligence can feel like a lot of hassle and paperwork, especially when a company already knows the target company or believe the merger would be a good fit and complement their existing offering. However, corporate solicitors recommend due diligence in any M&A because it is better to:

Front load the enquiries to avoid a deal collapsing at the last moment when something unexpected comes to light before completion
Carry out your due diligence so warranties are fit for purpose and there is less risk of post M&A litigation because one or both parties did not understand an aspect of the deal or what they were acquiring

Who carries out due diligence enquiries?

Due diligence enquiries are led by the purchaser but a holistic team approach can work best in some scenarios. Usually this involves your corporate solicitor taking the lead and working with company in-house staff as well as accountants, financial and tax advisors. This way your lawyers can make sure that all the right questions are asked and answered by the seller’s team and that any warranties are adequate.

It is important that the due diligence exercise is tailored to the specific M&A. If two companies have been in business together for many years, they may know a great deal about the internal procedures of the other company. Instead, due diligence may need to focus on a discovered company pension shortfall, pending litigation or insurance claims that may affect the value of the target company.

Tips on due diligence and successful M&As

Due diligence is an opportunity to reflect and check. Corporate lawyers view effective front loaded due diligence as the precursor to a successful M&A. They recommend :

Due diligence is thorough and the results assessed properly. That way, if necessary, you can walk away from the deal, renegotiate the purchase price and insist on additional warranties and indemnities, or proceed with an asset sale rather than a M&A
Due diligence should normally cover company information, accounts (audited, management and projections), tax, employment, health and safety record, claims record and pending insurance claims and litigation, IT and IP licensing issues and compatibility, key commercial contracts, senior employee contracts, business immigration and sponsor licences, commercial property and asset ownership and pensions
Consider if heads of terms will focus minds on getting due diligence done and the deal finalised
Assess if a confidentiality or non-disclosure agreement is needed as part of the due diligence process and consider data protection and disclosure requirements by the target company. Failure to do so may place the company in breach of the law or the regulations of a relevant professional body
Acquiring companies think of the wider picture when conducting due diligence and ensure that the target’s contracts and other legal commitments align with the acquiring company’s brand and reputation; whether that is for a quality product or an ethically sourced one. Likewise, is a key commercial contract or business lease due to end and will this impact on the feasibility and benefits of the M&A?
Taking time during the due diligence exercise to work out the best integration strategies; whether that is adjustments to product specifications or the introduction of TUPE transferred employees into the workforce

Contact our Mergers and Acquisitions Lawyers today

We understand the importance to your company of getting your M&A right. That’s why our corporate solicitors pay attention to detail and have the breadth of experience to understand the right questions to ask in the due diligence process. For bespoke M&A advice, tailored to your company needs, call us to discuss your requirements on 0330 107 0106.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.