I was sitting at my desk one cold February morning (I live in Canada so every morning in February is cold)…
While I was typing away like a happy little monkey, my Director strolled over and told me that our company was looking to buy another business in the US.
And since I was the Technology Contracts Manager for our company, I would be heading south for a few weeks to support the deal team.
Heading south in February was music to my ears… until he told me that by south he meant Buffalo. My Director had a cruel sense of humour.
At this point in my career, I’d only had cursory experience with Mergers & Acquisitions in the due diligence phase.
M&A was what the lawyers did, and I was a Contracts Manager. So I assumed my work would begin when the deal was done and the two companies had merged.
Sometimes that’s exactly what happens in M&A deals, and those are the ones that get into all sorts of trouble.
4 THINGS TO LOOK FOR IN CONTRACT DUE DILIGENCE
Lawyers (usually outside counsel) are brought in by both the buyer and seller to conduct financial due diligence and negotiate a deal.
Part of the due diligence is reviewing existing contracts to assess and quantify the risk of merging the two entities.
And the best way for lawyers to do that is by engaging subject matter experts in the due diligence.
Here are the four key areas where lawyers need to engage subject matter experts…
#1 – HUMAN RESOURCES
Almost every M&A deal involves acquiring personnel, so the Contracts Managers supporting the HR category need to look at employment contracts to assess any risk associated with the layoffs that inevitably follow an acquisition.
In our case, the company we were acquiring had some unionized workers so we had to bring in an expert on Labour Law in the US to assess the risk of acquiring those employees.
#2 – CLIENTS
If the business being sold has existing clients, the acquiring company needs to review the sales agreements to determine pricing, term, termination provisions and assignment language.
Some customers may not want to stay on post-acquisition, so the Contracts Managers responsible for sales agreements need to quantify the risk of losing revenue from customers who have the contractual right to terminate their agreement for convenience.
#3 – ASSETS
Depending on the deal, the acquisition may include facilities and equipment as well. If anything is leased, the Contracts Managers supporting Real Estate and Asset Management need to review the agreements to determine whether or not those assets can be transferred or the lease terminated.
#4 – TECHNOLOGY
As with client agreements, the acquiring company needs to review supplier agreements to determine pricing, term, termination provisions and assignment language.
Software suppliers in particular may have very specific provisions in their contracts that will not allow their licenses to be assigned to an acquirer without some negotiation on an assignment fee. In some cases the suppliers will want the acquirer to purchase the licenses net new.
Technology Contracts Managers are vital to the review and dispositioning of these contracts.
THE ROLE OF THE CONTRACTS MANAGER
Good Contracts Managers are more than just paper pushers. They know what goods and services are being used in their category, and they have an in-depth understanding of the current suppliers contracts.
So the real value of a Contracts Manager in M&A due diligence is their ability to quickly assess how a new contract will fit into the current contractual landscape.
If you’re a Contracts Manager that’s been brought in as a subject matter expert for due diligence, you should first establish a baseline for your organizations contractual terms and conditions. Things like standard Warranties, Indemnities, Limitation of Limitation of Liability, payment terms, etc.
If you manage IT contracts, you should also engage your technology team to understand the proposed transition plan. What would stay and what would be replaced post-acquisition.
The next step is to review the contracts for the company being acquired, identify risks and create a high-level negotiating strategy.
In some cases, you may need the selling company’s permission to engage key suppliers in the due diligence phase because of a potential restriction in the contract that could impact a merger or acquisition.
By following these steps you can establish a risk profile for the suppliers in an acquisition and hit the ground running once the M&A deal is signed.