Thorough Due Diligence In a Thrifty Market

In what remains an uncertain market, legal due diligence now assumes an increasingly pivotal role in the M&A process. Both sellers and buyers must adopt a strategic approach to due diligence, carefully weighing the costs against the necessity for a fully transparent process. While the reduction of transaction fees remains a critical focus of businesses during market uncertainty, history shows that failing to perform thorough due diligence almost always costs more money in the long term than it saves in the short term, as liabilities that would otherwise be flagged and properly allocated among deal parties, or even avoided entirely, can materially damage an acquired business’s future value. Knowing what to focus on in the due diligence process and how the costs of a good legal due diligence process can be reduced, then, remains a top priority for active acquirers.

With respect to legal due diligence, the focus should always be to evaluate risks in a way that allows a buyer to make well-informed business decisions, letting parties negotiate key deal terms for post-transaction integration. Of particular significance are a target's material contracts and obligations. Buyer’s counsel should be able to assess where material contracts provide for restrictive covenants, provisions related to exclusivity, “most favored nation” clauses, or requirements for consent in the event of an assignment. Additionally, in highly regulated sectors, legal due diligence also involves examining industry-specific regulations, such as analysis of intellectual property rights (for technology focused businesses), or CFIUS approval requirements (for businesses dealing with infrastructure or consumer data).

Legal due diligence should also include a review of key operational processes of a target business, assessing a target's capability to operate effectively after the transaction. Information regarding key customers and customer concentration, management's organizational structure, and possible personnel issues should be assessed to determine whether they could potentially disrupt a target’s business post-closing. By thoroughly evaluating operational aspects, buyers are able to proactively take actions that can mitigate known risks, and are able to better understand the value they are actually buying in their acquisition.

All of the above can be daunting to buyers hoping to keep transactions costs down. To optimize the legal due diligence process and manage costs effectively, there are several strategies that both buyers and sellers can employ. One key approach is to prioritize and tailor the scope of legal due diligence to the specific needs of the transaction, focusing on the most critical areas of potential risk and ensuring that review is thorough in key areas, allowing review to be more selective in less critical aspects of a target’s business. Collaborative efforts between legal teams on both sides, with clear communication and cooperation, can also help identify and resolve issues promptly, reducing the time and expenses associated with legal due diligence. Finally, standardized processes regarding document exchanges between deal parties and how information is reported should allow buyer and seller, in collaboration with their counsel, to streamline the review process and make appropriate changes as the due diligence process continues, avoiding costly uncertainty as to how review is conducted and reported to deal parties.

In addition to the above, engaging a boutique law firm can be a strategic move to further reduce due diligence costs. As boutique firms typically have lower overhead costs than larger law firms while, thanks to a changing legal market, also having experienced attorneys with expertise in a variety of markets. With boutique firms often offering a high level of partner involvement and personalized attention, clients can receive tailored advice and assistance, along with transparent and frequent communication with their legal counsel, that precisely aligns with their transaction's needs while keeping costs in check. The result is cost savings for clients in what is often the most expensive part of any transaction without losing the detail-oriented, thoughtful review that allows clients to avoid potentially significant liabilities and to make the best business decisions both before and after their transaction closes.