To carry out a Merger and Acquisition (M&A) deal, performing legal due diligence on the target object or target company is not to be ignored. Legal Due Diligence (LDD) is one of the important steps in the pre-transaction DD process. For the Seller, the implementation of LDD has certain meanings, helping the Seller to achieve M&A deal goals.
Why is Legal Due Diligence required from the Seller?
Due Diligence is widely seen as a vital task that is conducted throughout a business’s operations. Corporate LDD activities will assist businesses in evaluating their degree and capacity of adherence to legal requirements, providing the best possible plans to enhance corporate operations based on legal compliance.
Through LDD, the Seller in an M&A transaction will better understand the status of its business and make necessary corrections, contributing to the selling price of the company with a similar figure commensurate. Moreover, the Seller can determine its advantages and disadvantages because of the LDD, select a transaction strategy and establish a spending plan in the process of negotiating and executing M&A deals with potential Buyers.
Matters Sellers should note when performing Legal Due Diligence
Firstly, uniformity in Due Diligence goals
The Seller must establish and follow Due Diligence goals. During LDD, the Seller may identify some of its shortcomings and choose to overlook them to prevent consequences if information leaks to the outside. This does not, however, assist the Seller in avoiding risks that could lead to a breach of the commitments and agreements made in the transaction. Please be aware that the Buyer undertakes LDD and always will request the Seller to be liable, even after an M&A transaction.
Secondly, explicitly defines the company’s advantages and disadvantages
As mentioned above, based on the findings of LDD, the Seller is aware of the advantages and disadvantages of its business as well as the concerns that the target company owner must consider. From there, the Seller can decide on the precise strategy and plan to implement to both ensure its safety and maximize the benefits from M&A transactions.
By concentrating on its advantages, the Seller can increase the value of its relationship with the prospective Buyer and contribute to the transaction’s valuation.
When it comes to weaknesses and disadvantages, the Seller is aware of the main issue, the reason for it, and the course that needs to be taken for a solution.
How can the risk be reduced the most if it cannot be adjusted? The moment the Seller enters into a contract with the Buyer, their obligations to the target company, the Buyer, and other parties, could not be accomplished.
Thirdly, having an appropriate adjustment plan
Making plans to address shortcomings, disadvantages or weaknesses and planning to gain edges in the negotiation process and executing M&A transactions based on strengths and advantages are essential goals of LDD. Although it will not be simple to overcome weaknesses quickly, efforts will almost always be awarded or at the very least, they will help Sellers lower some of the risks and more clearly the road ahead.
As a result of carrying out LDD, Seller will be more careful and aware of the possible consequences if a decision is made correctly.
In addition, the Seller also understands its advantages when negotiating, knows what the main issues are, and brings benefits to the Seller or prevents risks on clever terms.
Thus, the process of Due Diligence including LDD is the process of calculating and self-evaluating the Seller’s business. Thereby, to have the greatest approach in M&A transactions with the Buyer, the Seller will identify its advantages and disadvantages. At the same time, it assists the Seller in making solutions and plans to deal with the backlog, ensure the safety of the Seller and minimize possible risks in the future.