Let's dive deeper into the specifics of contract review and supplier negotiations during the due diligence phase.

The Realities of Due Diligence Timing

Before sitting down to write this post, I asked friends and family how long they thought companies conduct due diligence before executing a merger or acquisition. Most believed it takes as long as necessary until the acquiring entity is satisfied with their understanding of the acquisition. The perception is that the bigger the deal, the longer the due diligence period.

However, the reality is that M&As either happen quickly or not at all. The bigger the deal, the smaller the window for due diligence. It might sound counterintuitive, but here's why:

3 Factors That Define the Speed of Due Diligence

1. Employees

• Loose lips sink ships. If the acquisition involves employees, they will eventually find out. If the valuation relies on key personnel staying post-acquisition, you don't want them looking for other jobs.
• Prolonged due diligence risks losing staff for nothing if the deal falls through.

2. Public Perception

• M&A activities, especially in high-visibility sectors like banking, can unsettle customers.
• Rapid consolidation helps manage public perception and prevents prolonged uncertainty.

3. Valuation

• The reasons for M&A vary, but there’s always a price attached.
• Longer due diligence can lead to a volatile price, driven by market conditions and new information.

How Contractual Risk Affects Valuations

While factors like annual revenue, profitability, geography, and technology influence valuation, the fear of the unknown can heavily impact acquisition cost. The buyer wants to understand the contractual risks they're assuming. Discovering risks lowers the valuation, motivating sellers to keep due diligence short.

For example, a non-assignable contract with a critical supplier can force the buyer to repurchase those goods or services post-acquisition, reducing the price the buyer is willing to pay.

The Challenge of Contract Review

Many buyers request all contracts for review during due diligence, but most companies struggle to locate and organize their contracts. Once gathered, the buyer must assess potential risks, but short due diligence windows complicate thorough reviews. Supplier agreements, in particular, often don't get the same priority as HR and customer contracts.

Prioritizing Supplier Agreements

Buyers often mistakenly believe suppliers won't walk away from recurring revenue and that they can be dealt with post-M&A. However, those experienced in M&As know better. Larger suppliers, aware of their critical role, may leverage their position to generate new revenue.

A Strategic Approach to Supplier Negotiations

Instead of assuming suppliers will comply post-acquisition, proactive negotiation can mitigate risks:

• Categorize Suppliers: Identify which suppliers are critical to the business and which are not.
• Assess Contract Assignability: Understand which contracts can be easily transferred and which cannot.
• Negotiate Early: Engage with critical suppliers during the due diligence phase to renegotiate terms or secure assignment agreements.
• Document Risks: Clearly document all potential risks and their financial implications.

Conclusion

Mastering pre-acquisition contract review and negotiations requires understanding the intricacies of due diligence timing, prioritizing critical supplier agreements, and taking a proactive approach to mitigate risks. By doing so, you can safeguard the acquisition value and ensure a smoother post-acquisition integration.

Stay tuned for more insights on navigating the complex landscape of M&As, and don’t hesitate to reach out with any questions or comments. Let’s elevate your negotiation game!