Buyer Focus: Simple Protection Measures for Complex M&A Transactions (Pt.1)

Mergers and acquisitions (M&A) are complex transactions involving the purchase, sale, or combination of companies. Typically this is either through the purchase of a company’s equity or it’s assets. M&A transactions are often accompanied by significant risks and uncertainties. As a buyer, it is essential to protect yourself in M&A transactions to minimize risks, ensure a successful transaction, and success following the transaction. In this post, we will discuss several ways a buyer can protect itself and mitigate risk in M&A transactions.

Conduct Due Diligence:
Due diligence is a comprehensive investigation of the seller company’s financial and legal standing, operational performance, and other relevant aspects. This typically involves working with your advisors to craft a number of relevant requests for documents and information about the seller company that is organized in a “data room” (these days, data rooms are usually shared drives or file rooms like google drive, dropbox, onedrive, etc.). The buyer should conduct a thorough due diligence process to identify any potential risks or issues that could affect the transaction. Due diligence provides the buyer with valuable information about the seller’s company’s assets, liabilities, contracts, and potential legal or regulatory issues. The buyer can use this information to negotiate better terms and conditions, including warranties, representations, and indemnities, in the purchase agreement.

Define the Scope of the Transaction:
The buyer should define the scope of the transaction clearly. This includes identifying the assets or business segments being acquired and the liabilities being assumed. Defining the scope of the transaction ensures that the buyer is only responsible for the assets and liabilities they agreed to acquire. It also helps to avoid any misunderstandings or disputes that may arise after the transaction is completed.

Negotiate Strong Representations and Warranties:
Representations and warranties are statements made by the seller about the seller company’s financial, legal, and operational standing. These statements are included in the purchase agreement, and the seller can be liable for any inaccuracies or misrepresentations following the closing of the transaction. The buyer should negotiate strong representations and warranties to protect themselves from any potential liabilities or losses that may arise after the transaction. The buyer should also negotiate with the seller to indemnify them for any losses or damages resulting from any breach of the representations and warranties.

We will explore a few additional measures buyer’s can take to protect themselves in the next installment of this post.

If you are exploring buying or selling a business, reach out to me and we can discuss your potential transaction.