Contract Management and M&A: Best Practices
2020 was a rough year for business, and mergers and acquisitions (M&A) took a hit in the spring as the pandemic brought commerce to an abrupt halt. However, M&A activity came back with a roar in the second half of the year, and is poised to continue its acceleration in 2021.
Accordingly, this is an opportune time for business leaders to assess how their teams handle M&A due diligence and post-merger integration between businesses. Given that contracts are how business gets done, contract management has to be a central part of any company’s M&A strategy.
But where should you start? Answering the following questions can help you to formulate your approach:
- Will you review a sampling of the acquisition target’s contracts, or every contract in the portfolio? Your answer probably depends on a combination of the size of the target business’s portfolio and your own business’s legal budget.
- What types of clauses are you looking for? How efficiently can you locate all of them?
- Where is the deal room? Are all of the documents stored in a physical location? More than one location? Do your lawyers need to travel to the client’s site(s) to perform due diligence?
- How often does your business engage in M&A activity? How many documents do your lawyers have to process, and how often? How much of your legal budget does that account for? A public company, investment bank, or private equity firm might have a high volume of M&A legal work on a regular basis, while a smaller, private company might need a solution to help control surges in legal costs when it engages in less frequent M&A transactions.
- How frequently do you review existing contracts? Do you have standardized contract management systems and workflows in place across your organization? Will the other business have to assimilate its practices following the acquisition?
Once you know the answers to these questions, it quickly becomes apparent how a contract intelligence platform can help””both during an acquisition, and after it’s complete.
Pre-Acquisition: Accelerated Validation and Close
Outdated processes for performing due diligence in anticipation of an acquisition can be exorbitantly time-consuming. In the past, the acquiring company’s lawyers had to travel to the other company’s offices and manually dig through mountains of binders containing physical documents, scouring pages in the hope of finding relevant information or something that might qualify as a red flag. In a deal room with hundreds of binders, it could be impossible to review every document without excessively hindering the deal, often necessitating that the attorneys settle for a hopefully representative sample of documents, rather than the whole trove. The power and speed of a contract intelligence platform can change that.
Here are five ways in which AI-powered contract management solutions can evolve how legal teams approach M&A transactions:
Artificial intelligence that leverages natural language processing and machine learning drastically decreases the time it takes to review documents. This efficiency makes it feasible to review an entire portfolio of contracts and related documents instead of just a smaller sample, all without adding to your legal budget or the time it takes to close the deal. In addition, simpler contract processes and approval workflows can reduce the work that goes into drafting the contract, further saving time and money.
Forward-looking terms and conditions in a business’s contracts can shed light on how much revenue the business can reasonably expect to collect from existing accounts or deals. A contract intelligence platform can guide you straight to the most important clauses and quickly extract relevant information including dollar amounts, term limits, assignment clauses, language governing a change of control in the business, and most favored nation provisions. Having reliable information regarding future cash flows helps to negotiate a fair purchase price.
Beyond business risks involving market forces, you need to examine legal risks embedded in the target’s contracts. Contract intelligence can bring to light indemnity clauses and other language limiting liability, key person clauses, restrictions on use of intellectual property, and more contract terms that will help you determine the level of risk the investment represents.
Cost-efficient AI tools can help to reduce a business’s spend on outside legal counsel. Junior associates have traditionally spent countless hours reviewing documents in order to conduct due diligence. AI can empower legal teams (whether internal or external) to do that work in a fraction of the time, freeing lawyers to spend more time on strategy and providing cost savings for in-house counsel with tight budgets. In addition, AI is more reliable than humans when it comes to document review, so you’re not only saving money, but also getting better value for your investment.
A physical deal room spilling over with reams of paper or rows of filing cabinets presents an obvious security threat. A contract intelligence platform, meanwhile, can provide a secure, virtual environment for document storage. Rule-based access allows only authorized users to access the specific documents they need, when they need them. In addition, digitizing the deal room eliminates travel costs, saving even more money for the business””especially in the case of a cross-border transaction.
Post-Acquisition: Rapid Contract Integration
The benefits of a contract intelligence platform don’t stop when the merger becomes effective. As anyone who has been on either side of a merger or acquisition knows, integration of separate business teams and processes is a journey. Contract intelligence can ease the transition. Here are some key ways in which boosting your business’s contract intelligence capabilities can smooth your path to post-acquisition profitability:
Good contract management software can rapidly integrate acquired contracts from any source and add them to the same central location where your business presently stores its contracts. In addition, having standardized, user-friendly contract lifecycle management tools and processes in place across your business will make it easier for new teams to adjust their workflows as necessary.
In addition, AI can quickly identify all of the expiring and auto-renewing contracts in an acquired portfolio. Convenient dashboards and timely alerts can help legal teams and contract administrators to ensure that nothing falls through the cracks during the post-merger integration of the businesses.
Rapid, accurate review of commercial agreements with consumers and vendors saves worker hours, enabling legal departments and procurement teams to focus on developing strategy and delivering value instead of completing repetitive tasks. Dashboards and customized reports mitigate risk by keeping key terms and deadlines top of mind. In addition, intuitive tools and a secure, centralized location for contract creation, storage, and management enable geographically dispersed teams to work together efficiently to drive the business forward.
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