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ENTREPRENEURS 12/19/2014@1:09PM 101.202views

20KeyDueDiligenceActivitiesInAMerger
AndAcquisitionTransaction
RichardHarroch,Contributor

ByRichardD.HarrochandDavidA.Lipkin

Mergersandacquisitionstypicallyinvolveasubstantial
amountofduediligencebythebuyer.Beforecommittingto
thetransaction,thebuyerwillwanttoensurethatitknows
whatitisbuyingandwhatobligationsitisassuming,the
natureandextentofthetargetcompanyscontingent
liabilities,problematiccontracts,litigationrisksand
intellectualpropertyissues,andmuchmore.Thisis
particularlytrueinprivatecompanyacquisitions,wherethe
targetcompanyhasnotbeensubjecttothescrutinyofthe
publicmarkets,andwherethebuyerhaslittle(ifany)ability
toobtaintheinformationitrequiresfrompublicsources.

Thefollowingisasummaryofthemostsignificantlegaland
businessduediligenceactivitiesthatareconnectedwitha
typicalM&Atransaction.Byplanningtheseactivities
carefullyandproperlyanticipatingtherelatedissuesthat
mayarise,thetargetcompanywillbebetterpreparedto
successfullyconsummateasaleofthecompany.

Ofcourse,incertainM&Atransactionssuchasmergersof
equalsandtransactionsinwhichthetransaction
considerationincludesasignificantamountofthestockof
thebuyer,orsuchstockcomprisesasignificantportionofthe
overallconsideration,thetargetcompanymaywantto
engageinreversediligencethatincertaincasescanbeas
broadinscopeastheprimarydiligenceconductedbythe
buyer.Manyoralloftheactivitiesandissuesdescribedbelow
will,insuchcircumstances,applytobothsidesofthe
transaction.
bas121Fotolia.com

1.FinancialMatters.Thebuyerwillbeconcernedwithall
ofthetargetcompanyshistoricalfinancialstatementsand
relatedfinancialmetrics,aswellasthereasonablenessofthe
targetsprojectionsofitsfutureperformance.Topicsof
inquiryorconcernwillincludethefollowing:

Whatdothecompanysannual,quarterly,and
(ifavailable)monthlyfinancialstatementsfor
thelastthreeyearsrevealaboutitsfinancial
performanceandcondition?

Arethecompanysfinancialstatementsaudited,
andifsoforhowlong?

Dothefinancialstatementsandrelatednotesset
forthallliabilitiesofthecompany,bothcurrent
andcontingent?

Arethemarginsforthebusinessgrowingor
deteriorating?

Arethecompanysprojectionsforthefutureand
underlyingassumptionsreasonableand
believable?

Howdothecompanysprojectionsforthe
currentyearcomparetotheboardapproved
budgetforthesameperiod?

Whatnormalizedworkingcapitalwillbe
necessarytocontinuerunningthebusiness?

Howisworkingcapitaldeterminedfor
purposesoftheacquisitionagreement?
(Definitionaldifferencescanresultinalarge
varianceofthedollarnumber.)

Whatcapitalexpendituresandother
investmentswillneedtobemadetocontinue
growingthebusiness,andwhatarethe
companyscurrentcapitalcommitments?

Whatistheconditionofassetsandliens
thereon?

Whatindebtednessisoutstandingorguaranteed
bythecompany,whatareitsterms,andwhen
doesithavetoberepaid?

Arethereanyunusualrevenuerecognition
issuesforthecompanyortheindustryinwhich
itoperates?

Whatistheagingofaccountsreceivable,andare
thereanyotheraccountsreceivableissues?

Shouldaqualityofearningsreportbe
commissioned?

Arethecapitalandoperatingbudgets
appropriate,orhavenecessarycapital
expendituresbeendeferred?

HasEBITDAandanyadjustmentstoEBITDA
 beenappropriatelycalculated?(Thisis
particularlyimportantifthebuyerisobtaining
debtfinancing.)

Doesthecompanyhavesufficientfinancial
resourcestobothcontinueoperatinginthe
ordinarycourseandcoveritstransaction
expensesbetweenthetimeofdiligenceandthe
anticipatedclosingdateoftheacquisition?

2.Technology/IntellectualProperty.Thebuyerwillbe
veryinterestedintheextentandqualityofthetarget
companystechnologyandintellectualproperty.Thisdue
diligencewilloftenfocusonthefollowingareasofinquiry:

Whatdomesticandforeignpatents(andpatents
pending)doesthecompanyhave?

Hasthecompanytakenappropriatestepsto
protectitsintellectualproperty(including
confidentialityandinventionassignment
agreementswithcurrentandformeremployees
andconsultants)?Arethereanymaterial
exceptionsfromsuchassignments(rights
preservedbyemployeesandconsultants)?

Whatregisteredandcommonlawtrademarks
andservicemarksdoesthecompanyhave?

Whatcopyrightedproductsandmaterialsare
used,controlled,orownedbythecompany?

Doesthecompanysbusinessdependonthe
maintenanceofanytradesecrets,andifsowhat
stepshasthecompanytakentopreservetheir
secrecy?

Isthecompanyinfringingon(orhasthe
companyinfringedon)theintellectualproperty
rightsofanythirdparty,andareanythird
partiesinfringingon(orhavethirdparties
infringedon)thecompanysintellectual
propertyrights?

Isthecompanyinvolvedinanyintellectual
propertylitigationorotherdisputes(patent
litigationcanbeveryexpensive),orreceivedany
offerstolicenseordemandlettersfromthird
parties?

Whattechnologyinlicensesdoesthecompany
haveandhowcriticalaretheytothecompanys
business?

Hasthecompanygrantedanyexclusive
technologylicensestothirdparties?

Hasthecompanyhistoricallyincorporatedopen
sourcesoftwareintoitsproducts,andifsodoes
thecompanyhaveanyopensourcesoftware
issues?

Whatsoftwareiscriticaltothecompanys
operations,anddoesthecompanyhave
appropriatelicensesforthatsoftware(anddoes
thecompanysusageofthatsoftwarecomply
withuselimitationsorotherrestrictions)?

Isthecompanyapartytoanysourceorobject
codeescrowarrangements?

Whatindemnitieshasthecompanyprovidedto
(orobtainedfrom)thirdpartieswithrespectto
possibleintellectualpropertydisputesor
problems?

Arethereanyotherliensorencumbranceson
thecompanysintellectualproperty?
3.Customers/Sales.Thebuyerwillwanttofully
understandthetargetcompanyscustomerbaseincludingthe
levelofconcentrationofthelargestcustomersaswellasthe
salespipeline.Topicsofinquiryorconcernwillincludethe
following:

Whoarethetop20customersandwhat
revenuesaregeneratedfromeachofthem?

Whatcustomerconcentrationissues/risksare
there?

Willtherebeanyissuesinkeepingcustomers
aftertheacquisition(includingissuesrelatingto
theidentityofthebuyer)?

Howsatisfiedarethecustomerswiththeir
relationshipwiththecompany?(Customercalls
willoftenbeappropriate.)

Arethereanywarrantyissueswithcurrentor
formercustomers?

Whatisthecustomerbacklog?

Whatarethesalesterms/policies,andhave
therebeenanyunusuallevelsof
returns/exchanges/refunds?

Howaresalespeoplecompensated/motivated,
andwhateffectwillthetransactionhaveonthe
financialincentivesofferedtoemployees?

Whatseasonalityinrevenueandworkingcapital
requirementsdoesthecompanytypically
experience?

4.StrategicFitwithBuyer.Thebuyerisconcernednot
onlywiththelikelyfutureperformanceofthetargetcompany
asastandalonebusinessitwillalsowanttounderstandthe
extenttowhichthecompanywillfitstrategicallywithinthe
largerbuyerorganization.Relatedquestionsandareasof
inquirywillincludethefollowing:

Willtherebeastrategicfitbetweenthecompany
andthebuyer,andistheperceptionofthatfit
basedonahistoricalbusinessrelationshipor
merelyonunprovenfutureexpectations?

Doesthecompanyprovideproducts,services,or
technologythebuyerdoesnthave?

Willthecompanyprovidekeypeople(isthisan
acquihire?)andifsowhatisthelikelihoodof
theirretentionfollowingtheclosing?

Whatintegrationwillbenecessary,howlong
willtheprocesstake,andhowmuchwillitcost?

Whatcostsavingsandothersynergieswillbe
obtainableaftertheacquisition?

Whatmarginalcosts(e.g.,costsofobtaining
thirdpartyconsents)mightbegeneratedbythe
acquisition?

Whatrevenueenhancementswilloccurafterthe
acquisition?

5.MaterialContracts.Oneofthemosttimeconsuming
(butcritical)componentsofaduediligenceinquiryisthe
reviewofallmaterialcontractsandcommitmentsofthe
targetcompany.Thecategoriesofcontractsthatare
importanttoreviewandunderstandincludethefollowing:

Guaranties,loans,andcreditagreements

Customerandsuppliercontracts
 Agreementsofpartnershiporjointventure
limitedliabilitycompanyoroperating
agreements

Contractsinvolvingpaymentsoveramaterial
dollarthreshold

Settlementagreements

Pastacquisitionagreements

Equipmentleases

Indemnificationagreements

Employmentagreements

Exclusivityagreements

Agreementsimposinganyrestrictiononthe
rightorabilityofthecompany(orabuyer)to
competeinanylineofbusinessorinany
geographicregionwithanyotherperson

Realestateleases/purchaseagreements

Licenseagreements

Powersofattorney

Franchiseagreements

Equityfinanceagreements

Distribution,dealer,salesagency,oradvertising
agreements

Noncompetitionagreements

Unioncontractsandcollectivebargaining
agreements

Contractstheterminationofwhichwouldresult
inamaterialadverseeffectonthecompany

Anyapprovalsrequiredofotherpartiesto
materialcontractsduetoachangeincontrolor
assignment

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6.Employee/ManagementIssues.Thebuyerwillwant
toreviewanumberofmattersinordertounderstandthe
qualityofthetargetcompanysmanagementandemployee
base,including:

Managementorganizationchartand
biographicalinformation

Summaryofanylabordisputes

Informationconcerninganyprevious,pending,
orthreatenedlaborstoppage

Employmentandconsultingagreements,loan
agreements,anddocumentsrelatingtoother
transactionswithofficers,directors,key
employees,andrelatedparties

Scheduleofcompensationpaidtoofficers,
directors,andkeyemployeesforthethreemost
recentfiscalyearsshowingseparatelysalary,
bonuses,andnoncashcompensation(e.g.,use
ofcars,property,etc.)

Summaryofemployeebenefitsandcopiesofany
pension,profitsharing,deferredcompensation,
 andretirementplans

EvidenceofcompliancewithIRSSection409A
inconnectionwithstockoptionissuances

Summaryofmanagementincentiveorbonus
plansnotincludedinaboveaswellasother
formsofnoncashcompensation

LikelihoodofneedforcompliancewithIRS
Section280G(goldenparachute)rulesin
connectionwithanypotentialacquisition

Employmentmanualsandpolicies

Involvementofkeyemployeesandofficersin
criminalproceedingsorsignificantcivil
litigation

Plansrelatingtoseveranceorterminationpay,
vacation,sickleave,loans,orotherextensionsof
credit,loanguarantees,relocationassistance,
educationalassistance,tuitionpayments,
employeebenefits,workerscompensation,
executivecompensation,orfringebenefits

Appropriatenessofthecompanystreatmentof
personnelasindependentcontractorsvs.
employees

Actuarialreportsforpastthreeyears

Whatagreements/incentivearrangementsarein
placewithkeyemployeestoberetainedbythe
buyer?Willthesebesufficienttoretainkey
employees?

Whatlayoffsandresultantseverancecostswill
belikelyinconnectionwiththeacquisition?

7.Litigation.Anoverviewofanylitigation(pending,
threatened,orsettled),arbitration,orregulatoryproceedings
involvingthetargetcompanyistypicallyundertaken.This
reviewwillincludethefollowing:

Filedorpendinglitigation,togetherwithall
complaintsandotherpleadings

Litigationsettledandthetermsofsettlement

Claimsthreatenedagainstthecompany

Consentdecrees,injunctions,judgments,or
ordersagainstthecompany

Attorneysletterstoauditors

Insurancecoveringanyclaims,togetherwith
noticestoinsurancecarriers

Mattersinarbitration

Pendingorthreatenedgovernmental
proceedingsagainstthecompany(SEC,FTC,
FDA,etc.)

Potentiallyspeakingdirectlytothecompanys
outsidecounsel

8.TaxMatters.Taxduediligencemayormaynotbe
critical,dependingonthehistoricaloperationsofthetarget
company,butevenforcompaniesthathavenotincurred
historicalincometaxliabilities,anunderstandingofanytax
carryforwardsandtheirpotentialbenefittothebuyermaybe
important.Taxduediligencewilloftenincorporateareview
ofthefollowing:

Federal,state,local,andforeignincomessales
andothertaxreturnsfiledinthelastfiveyears

Governmentaudits
 Copiesofanycorrespondenceornoticefromany
foreign,federal,state,orlocaltaxingauthority
regardinganyfiledtaxreturn(oranyfailureto
file)

Taxsharingandtransferpricingagreements

Netoperatinglossesorcreditcarryforwards
(includinghowachangeincontrolmightaffect
theavailabilitythereof)

IRSForm5500for401(k)plans

Agreementswaivingorextendingthetaxstatute
oflimitations

Allocationofacquisitionpurchasepriceissues

Correspondencewithtaxingauthorities
regardingkeytaxitems

SettlementdocumentswiththeIRSorother
governmenttaxingauthorities

9.AntitrustandRegulatoryIssues.Antitrustand
regulatoryscrutinyofacquisitionshasbeenincreasingin
recentyears.Thebuyerwillwanttoundertakethefollowing
activitiesinordertoassesstheantitrustorregulatory
implicationsofapotentialdeal:

Ifthebuyerisacompetitorofthetarget
company,understandingandworkingaround
anylimitationsimposedbythecompanyonthe
scopeortimingofdiligencedisclosures

Analyzingscopeofanyantitrustissues

Ifthecompanyisinaregulatedindustrythat
requiresapprovalofanacquisitionfroma
regulator,understandingtheissuesinvolvedin
pursuingandobtainingapproval

Confirmingifthecompanyhasbeeninvolvedin
priorantitrustorregulatoryinquiriesor
investigations

Addressingissuesthatmaybeinvolvedin
preparingaHartScottRodinofiling(if
thresholdsaremet)andeffectivelyresponding
toanysecondrequestfromtheDepartmentof
JusticeorFederalTradeCommission

ConsideringExonFlorioissuesifthe
transactioninvolvesnationalsecurityorforeign
investmentissues

OtherDepartmentofCommercefilingsifthe
buyerisaforeignentity

Understandinghowconsolidationtrendsinthe
companysindustrymightimpactthelikelihood
andspeedofantitrustorregulatoryapproval

10.Insurance.Inanyacquisition,thebuyerwillwantto
undertakeareviewofkeyinsurancepoliciesofthetarget
companysbusiness,including:

Ifapplicable,theextentofselfinsurance
arrangements

Generalliabilityinsurance

D&Oinsurance

Intellectualpropertyinsurance

Carinsurance

Healthinsurance

E&Oinsurance
 Keymaninsurance

Employeeliabilityinsurance

Workerscompensationinsurance

Umbrellapolicies

11.GeneralCorporateMatters.Counselforthebuyer
willinvariablyundertakeacarefulreviewofthe
organizationaldocumentsandgeneralcorporaterecords
(includingcapitalization)ofthetargetcompany,including:

Charterdocuments(certificateofincorporation,
bylaws,etc.)

Goodstandingand(ifapplicable)taxauthority
certificates

Listofsubsidiariesandtheirrespectivecharter
documents

Listofjurisdictionsinwhichthecompanyand
itssubsidiariesarequalifiedtodobusiness

Listofcurrentofficersanddirectors

Listsofallsecurityholders(common,preferred,
options,warrants)

Stockoptionagreementsandplans,including
bothstandarddocumentsandanydeviations
therefrom

Warrantagreements

Stocksaleagreements

Stockappreciationrightsplansandrelated
grants

Agreementsgrantingrestrictedstockunits

Stockholderandvotingagreements

Stockrelatedpreemptiverights,registration
rights,redemptionrights,orcosalerights

Agreementsrestrictingthepaymentofcash
dividends

Evidencethatsecuritieswereproperlyissuedin
compliancewithapplicablesecuritieslaws,
includingapplicablefederalandstatebluesky
laws

Recapitalizationorrestructuringdocuments

Agreementsrelatedtoanysalesorpurchasesof
businesses

Noshoporexclusivityobligations

Rightsoffirstrefusalorfirstnegotiationsin
connectionwithasaleofthecompanyorits
business

Minutesofstockholdersmeetingssince
inception,includingwrittenconsentstoaction
withoutameeting

Minutesofboardofdirectorsandanyboard
committeessinceinception,includingwritten
consentstoactionwithoutameeting

12.EnvironmentalIssues.Thebuyerwillwanttoanalyze
anypotentialenvironmentalissuesthetargetcompanymay
face,thescopeofwhichwilldependonthenatureofits
business.Whereanenvironmentalreviewisconducted,it
willtypicallyincludeareviewofthefollowing:

Environmentalaudits,recordsandreportsfor
 eachownedorleasedproperty,includingresults
oftestsorauditsofthecompanysproperties
andpossiblyneighboringfacilities

Hazardoussubstancesusedinthecompanys
operations

Environmentalpermitsandlicenses

Correspondence,notices,andfilesrelatedto
EPA,state,orlocalregulatoryagencies

Anyenvironmentallitigation,claims,or
investigations

AnyknownSuperfundexposure

Anycontingentenvironmentalliabilitiesor
continuingindemnificationobligations

Anycontractualobligationsrelatingto
environmentalissues

Theuseofanypetroleumproductsonthe
companyspropertiesotherthanbypassenger
vehicles

Anyasbestoscontainedinanyimprovements
locatedonthecompanysproperties

Recordsfromanypublicagencyinvestigationof
thecompanyspropertiesoranyneighboring
propertieswithrespecttoanyenvironmental
laws

13.RelatedPartyTransactions.Thebuyerwillbe
interestedinunderstandingtheextentofanyrelatedparty
transactions,suchasagreementsorarrangementsbetween
thetargetcompanyandanycurrentorformerofficer,
director,stockholder,oremployee,includingthefollowing:

Anydirectorindirectinterestofanyofficer,
director,stockholder,oremployeeofthe
companyinanybusinessthatcompeteswithor
doesbusinesswiththecompany

Anyagreementswithanyofficer,director,
stockholder,oremployeethatisentitledto
compensation

Anyagreementswhereanyofficer,director,
stockholder,oremployeehasaninterestinany
asset(realestate,intellectualproperty,personal
property,etc.)ofthecompany

14.GovernmentalRegulations,Filings,and
CompliancewithLaws.Thebuyerwillbeinterestedin
understandingtheextenttowhichthetargetcompanyis
subjecttoandhascompliedwithregulatoryrequirements,
includingbyreviewingthefollowing:

Citationsandnoticesreceivedfromgovernment
agenciessinceinceptionorwithcontinuing
effectfromanearlierdate

Pendingorthreatenedinvestigationsor
governmentalproceedings

Materialreportstoandcorrespondencewithany
governmententity,municipality.oragency,
includingFDA,USDA,EPA,andOSHA

Documentsshowinganycertificationof
compliancewith,oranydeficiencywithrespect
to,regulatorystandardsofthecompany

Reportsontheburdensandcostsofregulatory
compliance(includingERISA,laborandother
federal,state,andlocalregulation)

Anyproblemswithsuchregulatorycompliance
 (includingERISA,laborandotherfederal,state,
andlocalregulation)

Materialgovernmentalpermitsandlicenses
requiredtocarryoutthebusinessoroperations
ofthecompanyoritssubsidiariescurrentlyin
force

Informationregardinganyofthecompanys
permitsorlicensesthathavebeencanceledor
terminated

Extentofevidenceofthecompanysexemption
fromanypermitorlicenserequirement

15.Property.Areviewofallpropertyownedbythetarget
companyorotherwiseusedinthebusinessisanessential
partofanyduediligenceinvestigation,withsuchreview
including:

Deeds

Leasesofrealproperty

Deedsoftrustandmortgages

Titlereports

Otherinterestsinrealproperty

Financingleasesandsaleandleaseback
agreements

Conditionalsaleagreements

Operatingleases

16.ProductionRelatedMatters.Dependingonthe
natureofthetargetcompanysbusiness,thebuyerwilloften
undertakeareviewofthecompanysproductionrelated
matters,includingthefollowing:

Listofthecompanysmostsignificant
subcontractors,includingthedollarvolumeof
businessandthetypeofservicesorproducts
suppliedbyeachsubcontractor

Listofthecompanyslargestsupplierswiththe
amountandtypeofproductspurchasedfrom
eachduringthemostrecentfiscalyearsand
yeartodate,aswellaswhetherornotthe
supplieristhesolesourceofsuchproducts

Monthlymanufacturingyieldsummaries,by
product

Scheduleofbacklogshowingcustomers,
products,andrequested/scheduledshipping
dates

Copiesofinventoryreports

Suppliesormaterialsusedbythecompanyto
produceordevelopproductsthatareinshort
supplyorsubjecttoshortages

Productserviceprogramsandcopiesofstandard
formofservicecontractandanycontractswith
serviceproviders

Informationregardingbacklogsandlevelsof
plantoperation

Allagreementsandotherarrangementsrelated
totheresearch,development,manufacturing,
andtestingofthecompanysproducts

17.MarketingArrangements.Aspartofdiligence,the
buyerwillwanttounderstandthetargetcompanys
marketingstrategiesandarrangements,includingthrough
reviewing:
 Salesrepresentative,distributor,agency,and
franchiseagreementsofthecompany

Standardcompanysalesformsorliterature,
includingpricelists,catalogs,purchaseorders,
etc.

Allotheragreementsrelatedtothemarketingof
thecompanysproducts

Surveysofthemarketsthecompanyservesor
planstoserve,whetherornotcompiledbyorat
thedirectionofthecompany

Pressreleasesconcerningthecompany(orany
partnershiporjointventureinvolvingthe
companyoranysubsidiary)

18.CompetitiveLandscape.Thebuyerwillwantto
understandthecompetitiveenvironmentinwhichthetarget
companysbusinessoperates,includingbyobtaining
informationonthefollowing:

Thecompanysprincipalcurrentandanticipated
competitors

Technologiesthatcouldmakethecompanys
currenttechnologyormanufacturingprocesses
obsolete

Advantages/disadvantagesofthecompanys
productsandtechnologiescomparedtothoseof
competitors

19.OnlineDataRoom.Itiscriticallyimportanttothe
successofaduediligenceinvestigationthatthetarget
companyestablish,maintain,andupdateasappropriatea
wellorganizedonlinedataroomtoenablethebuyerto
conductduediligenceinanorderlyfashion.Thefollowing
arethecommonattributesandcharacteristicsofaneffective
dataroom:

Thetargetcompanymakesitavailabletothe
buyerasearlyintheprocessaspossible,atthe
latestimmediatelyfollowingtheparties
finalizingtheletterofintentortermsheet

Thedataroomhasalogicaltableofcontentsor
directoryandfulltextsearchcapabilities(which
requiresscanningofalldocumentswithoptical
characterrecognitionsoftware)

Thedataroompermitsbookmarkingwithinthe
application

Subjecttoconfidentialityconcerns,thebuyeris
permittedtoprintdocumentsforofflinereview

Thedataroomiskeyedtoanyduediligence
checklistprovidedbythebuyertofacilitate
crossreferencingandreview

Ideally,accesstothedataroomisaccompanied
bydeliverybythecompanytothebuyerofa
draftdisclosurescheduleandallmaterials
referredtointhedisclosurescheduleareinthe
dataroom

Updatestothedataroomareclearlymarkedor
triggeremailnotificationstothebuyerscounsel,
tohelpensurethatnothingismissedas
supplementalmaterialsareaddedduringthe
process

20.DisclosureSchedule.AspartofanyM&Atransaction,
thetargetcompanywillberequiredtopreparea
comprehensivedisclosurescheduleaddressingmanyofthe
keydiligencetopicsdescribedabove,andidentifyingany
exceptionstothecompanysrepresentationsandwarranties
intheacquisitionagreement.Carefulpreparationofthis
disclosurescheduleisextremelyimportantandtime
consumingforthecompany.Itisnotunusualforthe
companytohavetoreviseandupdatethedocumenta
numberoftimesbeforeitisreadyfordeliverytothebuyer.
Thatmeansthatisessentialforthecompanytobegin
preparingthedisclosurescheduleveryearlyintheplanning
stagesofanM&Atransaction.Thebuyerandthebuyers
counselwillbelookingforthefollowinginthedisclosure
schedule,amongmanyotheritems:

Doesthedisclosurescheduleaccuratelytieinto
therepresentationsandwarrantiessetforthin
theacquisitionagreement?

Areallmaterialcontractsandamendments
listed,withdatesandcounterparties?

Areallcontractslistedinthedisclosureschedule
containedinthetargetsonlinedataroom,and
havethosecontractsbeenreviewed?

Haveallpatentsissuedandpendingbeen
summarizedandlisted?

Areanyimportantcontractsaffectedbya
changeincontrol?Willconsentsbeobtained
fromthecounterpartybeforeorafterthechange
incontrol?

Iflitigationislisted,hasananalysisbeendone
ofthepotentialexposure?

Ifthereareliensonanyassets,howwillthose
liensberemovedatclosing?

Arethereanyunusualemploymentagreements
orseverancearrangements?

Istheoutstandingcapitalstock,options,and
warrantsofthecompanyproperlylisted?

Dothecompanyscontinuingcontractsprovide
foranyissuesforthecompanymovingforward?

Arethereanymaterialmatterssetforthinthe
disclosureschedulethatareinconsistentwith
statementspreviouslymadeonbehalfofthe
company,orwiththevaluationthatthebuyer
hasplacedonthebusinessbeingacquired?

Doesthedisclosurescheduleincludeanybroad
disclaimersorgeneralizeddisclosuresthat
wouldpreventthebuyerfromraisinglegitimate
claimsfollowingtheclosingifindividual
representationsandwarrantiesturnedouttobe
untrue?

Aretheredisclosuresorstatementsinthe
disclosureschedulethatareinternally
inconsistentwitheachother?

Conclusion

AnM&Atransactiontypicallyinvolvesasignificantamount
ofduediligencebythebuyerandthebuyerscounseland
accountants.Bybeingpreparedfortheduediligence
activitiesthatatargetcompanywillencounter,theprocess
cangosmoothlyandquickly,servingthebestinterestsof
bothpartiestothetransaction.

CopyrightRichardD.Harroch.AllRightsReserved.

AbouttheAuthors
RichardHarrochisaManagingDirectorandGlobalHead
ofM&AforVantagePointCapitalPartners.DavidLipkinis
apartnerintheCorporateDepartmentatthelawfirmof
Morrison&FoersterLLPinPaloAlto,specializingin
mergersandacquisitions.

ReadallofRichardHarrochsandDavidLipkins
articlesonAllBusiness.com.

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