As the market continues its recovery and interest rates remain at historic lows, we have seen a significant increase in M&A activity in both the private and public markets. While no two transactions are the same, most deals go through a similar process. Regardless of whether you are on the buy-side or the sell-side, be on the alert for common mistakes that can prove costly.
Not utilizing non-disclosure agreements (NDAs)
Use an NDA to legally safeguard confidential information and provide an extra level of security for sensitive items such as intellectual property. It is important to be involved in tailoring the terms of the agreement to ensure adequate coverage.
Conducting inadequate due diligence
When going through the due diligence process, take time to thoroughly review financial and nonfinancial details. Ensure that you have a strong understanding of the corporate environment as well as what the financial information represents and how it is captured.
To avoid costly post-close integration issues, fully define the integration process and management’s strategy for addressing any issues that may arise. These could include incompatible IT infrastructures and different transactional processing policies, as well as organization and reporting structures and employee responsibilities post-merger.
Spending time pre-close to anticipate how you would address these potential scenarios should greatly reduce the amount of time and resources needed post-close if a situation does arise.
Not being as detailed as possible in the purchase agreement
The purchase agreement serves as the basis for how the transaction will be executed, so it is very important to ensure that all terms, details, and examples are properly included. This will be especially helpful should a dispute arise post-close. Details should include purchase price adjustment clauses and specific financial metrics on which the adjustments are based - typically net working capital (NWC) or earnings before interest, depreciation, and amortization (EBITDA).
The purchase agreement should also avoid broad statements such as a general reference to GAAP compliance. Go a step further and be specific about the acceptable method of GAAP being used. With multiple acceptable methods of GAAP, especially regarding reserves, be sure that both parties are in agreement about which method is being applied. It may also be helpful to include examples, especially when calculating any purchase price adjustments.
Having specific language for terms and purchase price calculations can limit the potential for certain disputes, but it cannot prevent all of them. As such, it is important for the purchase agreement to outline a dispute resolution process that includes the time period to submit disputes, where and how they must be sent, who will serve as the arbitrator, and how the arbitration process will be conducted.
Agreeing on the arbitrator before executing the purchase agreement may take time, as both parties need to be in agreement. However, having a detailed dispute resolution process in place should help reduce unnecessary costs and allow parties to reach resolution in a more effective manner.
All M&A deals are unique and require time and effort. Be careful not to cut corners during the process. Giving adequate consideration to the items outlined above will increase your chances of a smooth and successful transaction.
If you would like to discuss how this topic relates to your business, contact us at 215.441.4600.