Contracts are the legal mechanism by which two parties agree to render services or payment to each other—which makes them an essential business instrument. But in high-stakes situations or lengthy partnerships, it’s not enough for both parties to simply trust that the other entity will faithfully meet the contract’s terms and conditions.
That’s where contract audits come in, helping protect you from legal risk during transactions such as M&A deals. By performing audits at regular intervals, including at the beginning of the relationship, both participants in an M&A deal can ensure that their business partners are complying with their contractual obligations.
Although contract audits can be a challenge for many organizations, they’re a major part of any M&A due diligence investigation, and they’re much easier to deal with when you’re well-prepared. Whether you’ve just been notified of an upcoming audit, or you want to get a head start on the next one, this article will discuss 5 crucial steps to prepare for a contract audit.
1. Gather and organize all contracts
The first step to prepare for a contract audit is to collect and organize your contract portfolio for the auditors to examine. The relevant contracts will depend on the nature of the business, but may include:
Supplier and vendor contracts
Loans and credit agreements
Property leases and mortgages
Service and maintenance contracts
Non-disclosure and confidentiality agreements
Exclusivity and non-compete agreements
Patent, trademark, and intellectual property agreements
IT hardware and software licenses and purchases
For a more complete list of contract types to prepare, download The Contracts Checklist for M&A Due Diligence.
2. Research common questions and requests
If you’ve already gone through the contract audit process, you have the advantage of wisdom and experience. However, if you’ve never undergone a contract audit before, prepare yourself by understanding how the process usually goes.
Plan ahead for the most frequent contract-related questions and inquiries. For example, what are the proposed scope and timeline of the audit? What are the auditors’ primary objectives? What standards will they be evaluating you against? What documents are the auditors likely to request during the process?
3. Identify issues and gaps
Even the most well-oiled companies may have compliance issues or hidden contract loopholes that put them at legal risk. The goal of the contract audit process is to identify these problems and gaps well before the deal is inked, so that they can be fixed and put to rest.
The contract audit process isn’t intended to be punitive; instead, its goal is to limit both parties’ business and legal risk to give the M&A transaction the greatest chance of success. Instead of trying to apportion blame for any mistakes you discover, the best path forward is to focus on how to resolve them constructively.
4. Collaborate with other teams where necessary
It’s a common misconception that contract audits strictly pertain to your legal team. Encouraging collaboration and cooperation with other teams in your organization is key for a contract audit to be successful.
Auditors may need to speak with people across the organization in a variety of roles, including: finance, sales, marketing, logistics, and more. Reassure your employees that the audit’s primary goal isn’t to find faults, but to ensure compliance.
5. Decide if implementing software can help
As your business grows, you may have hundreds or thousands of contracts active at any point in time. Trying to keep track of the deadlines and deliverables for each one is far too much for any single person to handle without help from the right tools.
If you find that your business contracts have become unmanageable—or if you don’t want to waste hours and hours of your employees’ valuable time—consider using dedicated contract management software to help ease the burden. Purpose-built contract management software offers the features you need to make your contract management process more efficient and productive: a central contract repository, advanced search functionality, custom reporting options, and much more.