M&A Deals From a Legal Perspective
“Too much of an abstract framework is the mistake that lawyers make, but not being abstract enough is a mistake that non-lawyers make. - Brett Shawn
Deals have become more complicated in the last 18 months from a legal perspective. The market has been too seller-friendly, and buyers are finding themselves agreeing with many things that they usually would not.
But pandemic or no pandemic, there are certain risks that you need to be aware of that can stop the entire deal altogether. Knowing how to mitigate these risks will help you close the deal faster and more efficiently.
The most basic risks that you need to watch out for are diligence risks. You need to verify everything that the company has told you by reviewing all of the contracts and financials.
There is also a risk around consummating the deal itself. If you, as a buyer, are trying to get a loan from the bank to fund the deal, the bank will ask to assess the seller. You need to put a covenant in place with the seller to cooperate with the bank in order to get your funding. Otherwise, the deal might fall off.
Deal jump risk
Deal jump risk is usually for public companies. Board members have a fiduciary duty to get the highest price for their stakeholders, resulting in deal jumping. If someone else suddenly wants to pay more than the original buyer, they can jump to the new buyer.
Be on the lookout for red flags. For example, if basic information is difficult to access. They might be hiding something, and receiving inconsistent information can also create credibility and trust issues. Also, private companies can sometimes be too informal with their processes which can cause a problem in the long run.