M&A due diligence will adapt to the changing questions asked by buyers and new risk assessments in the post-Covid world.
Any sudden disruption to the economy has wide ranging impacts, including to m&a activity. Uncertainty can pause m&a as purchasers and sellers reassess priorities, valuations may change as a result of pandemic risks, and buyers and sellers may no longer have the resources to devote to closing a transaction. Both parties to the deal will need to reassess what has changed in the post-Covid world as the economy begins to recover from the crisis.
Buyers are likely to be more sensitized to risks in buying a business in the post-Covid world and will seek to understand more deeply how the value proposition of any acquisition may have changed. Accordingly, thorough due diligence will be critical to understand not only the risks historically present, but the new ones presented post-Covid. While due diligence is an ongoing process throughout a deal, sellers can use the pause in m&a activity during the pandemic to begin to assemble the due diligence that will be required for a successful m&a transaction.
Purposes of M&A Due Diligence
Buyers and sellers will consider the purposes to be accomplished by due diligence in light of the pandemic.
- Understanding the business being sold
- What upside will the buyer realize through the acquisition? How has the pandemic affected, and how will it continue to affect, the potential upside?
- What risks and liabilities come with the business? Have these been accentuated by the pandemic?
- What is the value of the business? Has the value of the business, and its prospects, been negatively influenced by the pandemic?
- The results of due diligence will necessarily influence the negotiating position of the parties – the party with the deeper knowledge having the upper hand as it can more effectively assess risk – and enable the parties to address issues upfront rather than after-the-fact in litigation.
Scope of Legal Due Diligence
The following are some of the principal areas covered in legal due diligence:
- Intellectual Property. While critically important for a tech company whose products themselves may be protected intellectual property, it is also a critical inquiry in all acquisitions:
- How is the company’s intellectual property protected: patents, trademark, copyright, trade secrets?
- Has the seller infringed on any other party’s intellectual property rights?
- Is the seller a licensor or licensee of critical intellectual property?
- Customers. Who are the top customers and what is the customer concentration? Historical information here may be less useful if covid has caused major industry or company changes
- Material Contracts. What are seller’s material contracts? This will likely be an extensive part of the due diligence, and collating this information in advance of the transaction can highlight any issues (e.g. unsigned contracts, contracts with particular risks etc.)
- Employees. Who is the management team and what employee policies does the company have in place? Again, any HR cleanup can be taken care of in advance of a transaction.
- Cybersecurity and Data Privacy. This is an evolving area and one that should be focused on in advance of a transaction. A business will need to understand its cybersecurity risks, have implemented mitigating measures, and understand the data privacy laws to which it may be subject. In particular, data privacy laws may have extra-territorial reach, so US companies may need to consider European data privacy laws (e.g. the European Union’s General Data Protection Regulation (“GDPR”) in addition to local regulations (e.g. the California Consumer Privacy Act (“CCPA”)).
If you require any further information about m&a due diligence, please contact Edward Grenville, Managing Shareholder, Inspire Business Law Group, PC (egrenville@inspirelawgroup.com; +415 279 0779; www.inspirelawgroup.com).
This article is provided for educational and informational purposes only and is not intended to be, and should not be construed as, legal advice.
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