The Mergers & Acquisitions Handbook A Practical Guide to Negotiated Transactions
significantly involved in this process. In this step, members of management of the disclosing party may prepare and deliver detailed presentations that give an overview of the operations, prospects, and finances of the subject company. The acquisition team will then have the opportunity to talk to these individuals to “drill down” on the assumptions and statements made in the presentations. An important fact to remember in these situations is that presentation materials, statements made in these meetings, handouts, and other materials will directly affect the scope and substance of the representations and warranties and the extent of indemnification obligations (if any) in the definitive acquisition agreement. The buyer’s team will note any inconsistencies and inaccuracies in these statements and use these facts to shift any risks relating to the statements to the seller and its stockholders under the representations, warranties, and covenants contained in the definitive agreement.
Results of Review The results of the due diligence review will ripple through all aspects of a proposed M&A transaction. A detailed summary of the due diligence review, often called a due diligence memo, is usually prepared by counsel as a way to organize, track, and manage which documents have been reviewed, who reviewed them, and what issues or action items were identified. The due diligence memo may also become an important tool for both the business and legal aspects of negotiating the final deal terms. Once the parties have digested the results of their respective due diligence investigations, the last step in the due diligence process is making certain determinations: • Can or should we do the deal? • Do we still want to do the deal? • Is the seller worth the valuation as originally proposed or should there be a reduction in the purchase price? • Should an alternative form of consideration or payment be considered, such as an earn-out? • To what extent should the scope of the representations and warranties be expanded? • Is an adjustment to the indemnification and escrow term or amount necessary? • Should additional covenants or conditions to closing be added (e.g., third-party consents, employee retention targets, required terminations (of contracts, customers, or personnel)? 30