Understanding Contract Risks Before Completing an M&A Transaction
Risk & Compliance
Conducting contract due diligence both before and after a merger or acquisition is critical to the success of a business transaction. The state of a business’s contracts holds important information about the value of the business, as well as potential liabilities. Before finalizing a merger or acquisition, contract reviews are a form of investigation. The acquiring business needs to understand any and all contract features that could cause challenges down the road.
Here are four things to look for before an M&A transaction is finalized:
Non-compete clauses and other restrictions can impose disadvantageous limits on the acquiring business. This can affect the overall value of the merger or acquisition.
Some contracts set complicated conditions over a transfer. Not providing sufficient notice, for example, could be a breach of the contract requirements. In some cases, a contract may not be transferable, and the companies will have to figure out an alternative solution.
Contracts that have already been breached or are likely to be breached soon pose immediate risks to the purchasing company. It’s also important for the legal team to consider provisions that could make it difficult to transition the accounts through the merger or acquisition process. In some cases, remedying some contract issues is essential before the agreement can proceed.
This often-overlooked area addresses how incoming contracts comply with the purchasing company’s standards for contractual relationships. The two companies may have worked under different standards for how much liability was acceptable, or what policies, language, and procedures address risks the company is particularly concerned about.
The Contracts Checklist for M&A Due Diligence addresses some ways to address issues uncovered during the pre-transaction review, and processes to implement once the merger or acquisition moves forward. This eBook also contains a non-exhaustive list of important contract types to help keep track of the contract categories that need to be reviewed and understood during the due diligence process.
Download your copy of the checklist today to start preparing for a successful M&A transaction.
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