Legal Due Diligence: Carefully Check Your M&A Target

What may safeguard you from a business acquisition failure is a legal due diligence.

When you hear about M&A deals, you inevitably run across that mysterious phrase: legal due diligence (LDD).

What’s that? Why and when would you need it?

Legal Due Diligence

A crucial stage of any M&A transaction, an LDD is essentially a legal review of documents and information on the target company or assets.

Objectives

The primary goal of an LDD is to find legal risks. Then, to analyze, assess, and describe those risks. Finally, to recommend mitigating measures.

Setting up red flags is where the LDD does its best and gravest. This is a factor that largely determines whether the deal would go through or not. Specifically, the LDD may disclose a dealbreaker. If unresolved, the latter may ultimately turn into a showstopper.

Timing

Depending on your deal structure, an LDD can precede or follow conclusion of a sale-and-purchase agreement, be it a share deal or an asset deal. If the LDD runs after the SPA, then the agreement would be conditional on successful completion of the review.

Results

The LDD findings, risks, and recommendations ultimately find their way into an LDD report. As a result, an LDD usually takes a lot of time. That’s where the legal bill becomes quite hefty.

The LDD results turn into the SPA representations and warranties, disclosure schedules, and indemnities. Those provisions usually involve hot bargaining.

Who needs an LDD, especially given that it is normally so costly? An LDD is paramount for both seller and buyer.

Buyer’s LDD

For a buyer, it allows to check the target. If it’s worth less than what the seller asks, the LDD can help the buyer reduce the purchase price or even avoid unfavorable deal at all. The LDD thus allows to buy for less.

Seller’s LDD

For a seller, on the other hand, the LDD helps prepare business for sale. In particular, the LDD enables the seller to clean up the house for the guest, namely the target for the buyer. The LDD hence allows to sell for more.

Arrangement

To conduct a legal due diligence for the buyer, the seller has to arrange for the target to provide relevant documents and information to the buyer. In the modern day and age, the LDD materials are usually provided online in a data room.

The Buyer then has a certain period of time (for example, a month) to review, analyze, and assess the documents and information. By the result, the buyer determines how to proceeds with its purchase.

To run an LDD for itself, the seller merely demands similar documents and information from its target.

As you can sense, risk-averse people have no way to avoid an LDD. That’s why it’s an integral part of any M&A deal.

Stay risk-free!