Mergers and acquisitions (M&A) are rarely limited to the negotiation and signing of a share purchase agreement. An M&A transaction is a multi-stage process involving the preparation of the target company for a potential sale, preliminary negotiations between the parties, due diligence, valuation and purchase price discussions, the allocation of risks between buyer and seller, negotiation of the transaction documents, and ultimately signing and closing.<\/p>\n
Understanding how these stages interact is important for both buyers and sellers. Decisions taken at an early stage of the transaction may directly affect the purchase price, the contractual protections requested by the buyer and, in some cases, whether the transaction can be successfully completed.<\/p>\n
Harvey Arasan\u2019s M&A Essentials: A Practical Guide for Buyers, Sellers and Advisors<\/b><\/span> provides a practical overview of the principal stages, documents and mechanisms commonly encountered in an M&A transaction.<\/p>\n Although the structure of each transaction depends on the target company, the parties and the industry concerned, an M&A process will generally involve a number of identifiable stages.<\/p>\n For a seller, preparation may begin well before a potential buyer is given access to information about the company. The shareholders must first determine the scope of the proposed sale, including whether all or only part of their shares will be transferred. Where existing shareholders intend to retain an interest in the company following the transaction, the parties may also need to negotiate their future relationship through a shareholders\u2019 agreement.<\/p>\n The seller may also conduct a vendor due diligence<\/span> exercise before approaching potential buyers. Identifying issues relating to contracts, employees, licences, intellectual property, corporate records or other areas at an early stage gives the seller an opportunity to address potential risks before they become issues during negotiations.<\/p>\n Depending on the structure of the sale process, an information memorandum<\/span> may then be prepared to introduce the target company, its business and its financial and operational characteristics to potential buyers.<\/p>\n Preliminary discussions between the parties may lead to a letter of intent (LOI) or term sheet<\/span>, followed by the buyer\u2019s due diligence review, negotiation of the transaction documents, signing, satisfaction of any conditions precedent and closing.<\/p>\n Due diligence is one of the central stages of an M&A transaction.<\/p>\n From the buyer\u2019s perspective, due diligence provides an opportunity to examine the target company before completing the acquisition and to identify legal, financial, tax, operational and other risks associated with the business.<\/p>\n The scope of the review will depend on the characteristics of the target company and the transaction. Legal due diligence may cover, among other matters, the target\u2019s corporate structure, material contracts, employment relationships, licences and regulatory matters, intellectual property rights, real estate and ongoing or potential disputes.<\/p>\nWhat Are the Main Stages of an M&A Transaction?<\/b><\/span><\/h2>\n
Why Is Due Diligence Important in M&A?<\/b><\/span><\/h2>\n