Importance of conducting comprehensive M&A Due Diligence – Part 2

M&A Due Diligence

This post in continuation with yesterday topic on the importance of conducting comprehensive M&A Due Diligence.
The link to the part one of the article is here
The other important areas of focus for Due Diligence are:

Insurance M&A Due Diligence

In an acquisition, the buyer need to review the seller insurance policies taken, premiums for each policy, claims history along with seller compliance to payment of the policies.
The important insurance policies to review include:

• General Liability Insurance
• Cybersecurity insurance
• IP insurance
• Vehicle Insurance
• Health Insurance
• Employee liability insurance
• Keyman insurance
• Worker compensation insurance

General Corporate Matters in M&A due diligence

The corporate records and organizational documents of the seller needs to be reviewed and validated.Generally this is done by the attorney and legal professionals on the buyer organization.
Some of the documents generally reviewed includes:

• Charter documents like Certificate of Incorporation and bylaws etc
• List of subsidiaries and their charter documents
• List of current officers and directors
• List of security holders, Stock options agreements and plans
• Warrants and Stock sale agreements
• Stock redemption rights
• Stockholder voting agreements
• Recapitalizing and restructuring documents
• Minutes of meetings of Board of Directors, board Committee and stock committee since inception

Environmental M&A Due Diligence

The buyer need to validate whether the seller business policies confirm to the environmental regulations and compliance.
The due diligence needs to review the following points:

• Environmental audits and records for each owned/leased property of the seller
• Check if any hazardous substances are used in the seller operations
• Environmental permits and licenses
• Any environmental litigation and claims
• The use of petroleum products or asbestos on the seller properties

Related Party Transactions in M&A due diligence

The buyer needs to understand the existence and detail of any transactions or agreements between the seller and the corporate officer, director or any former/current employees of the seller organization.
Following points need to be evaluated

• Does the director, majority shareholder or employee have direct or indirect interest in a business which is a competitor to the seller?
• Any agreements in which the director, employee or shareholder has interest in any assets (includes real estate, IP) of the seller.

Compliance with Government regulations and filings in M&A due diligence

The buyer needs to verify whether the seller is in compliance with all the regulatory requirements.
The seller needs to review the following:

• Notices received from government agencies from the date of inception till date
• Pending government proceedings
• Certificates copies and documents on compliance to regulatory standards
• History of any licenses and permits that have been cancelled or exempted

Property M&A Due Diligence

The buyer needs to review all the properties that are owned and leased by the seller.Hence the review needs to include:

• Deeds and leases of trusts and mortgages
• Financial leases, sales and leaseback agreements
• Operating leases and conditional sales agreements

Marketing Arrangements in M&A due diligence

The buyer will want to review the seller marketing strategies as part of the due diligence.This includes reviewing:

• Agency agreements of the seller and other agreements related to the marketing of the seller products/services
• Review of the seller branding strategy
• Review of the seller demand generation initiatives and the sales opportunities generated by the marketing team
• Review marketing campaigns and collaterals used.

Competitive Landscape in M&A due diligence

The buyer needs to understand the competitive landscape in which the seller business operates and needs to obtain the following information:

• Current and the anticipated competition
• Intensity of the competition
• Any digital disruption or the latest technology that could render the seller services less competitive
• Advantages and disadvantages of seller services relative to its competitors
• Market share of the leading competitors

Conclusion

• A M&A transaction involves multiple parties from buyer deal team, attorneys, business team and third party consultants to undertake significant amount of due diligence
• An effective and detailed M&A due diligence would identify key risks, mitigation to risks and opportunities in the transaction which would enable the buyer to decide the final valuation of the seller business
• The sellers on the other hand would be better served by keeping all the relevant documents uploaded in the dataroom so that the process is smooth that ensure best interests of all parties to the transaction.