Written by Simón R. Barth, Partner at ONEtoONE Corporate Finance Colombia.
Mergers and acquisitions (M&A) are complex, high-stake transactions that demand a blend of strategic insight, financial acumen, and legal expertise. While M&A advisory firms play a pivotal role in identifying potential buyers, negotiating key deal elements, and steering the transaction toward a favorable outcome, the involvement of a legal firm with proficient legal expertise in mergers and acquisitions is equally critical to the success of the deal. This article will explore the vitality of selecting the right legal partner in M&A transactions.
The Gatekeepers of Due Diligence and Compliance
Legal expertise in navigating pre-diligence agreements
Before due diligence begins, numerous agreements, including confidentiality and intent letters, must be meticulously reviewed and drafted. A skilled legal team ensures these documents are watertight, safeguarding your interests from the outset.
“Housekeeping” during due diligence
The due diligence phase is akin to a comprehensive health check of a company. Legal firms play a crucial role in “housekeeping” ensuring all legal documents are compliant and updated. This process includes scrutinizing contracts, employment records, intellectual property rights, and regulatory compliance. The legal team’s ability to effectively manage and rectify legal discrepancies is critical to maintaining the deal’s momentum.
You may be interested in reading our article: How to ensure a successful due diligence process when selling your company
The role of legal expertise in mastering the art of the Sale and Purchase Agreement (SPA)
The complexity of SPAs
Sale and Purchase Agreements (SPAs) are the heart of M&A transactions. They can range from 45 to over 100 pages, sometimes drafted in multiple languages, particularly in cross-border deals, and often include numerous annexes. A proficient legal team adept at navigating such complexity is indispensable.
Diverse legal expertise
Mergers & acquisitions transactions require legal expertise across various domains. This includes tax, labor, commercial, compliance, and competition laws. A smaller legal firm, lacking expertise or manpower, may struggle to address these multifaceted legal challenges promptly and accurately.
You may be interested in reading our article: The sales and purchase agreement (SPA): what should it contain?
Using legal expertise to negotiate key terms and safeguarding interests
Declarations, guarantees, and holdbacks
SPAs contain critical sections like declarations, guarantees, and holdback clauses that require careful negotiation. A well-versed legal team will negotiate these terms to protect your interests, especially in scenarios involving unexpected liabilities.
Speed and precision in deal closing
The closing phase of a deal requires swift and precise legal work. A legal team that can efficiently handle complex negotiations and paperwork is crucial to avoid delays that can jeopardize the deal.
The risks of representation with inadequate legal expertise
With the right legal expertise, transactions can avoid significant delays. This affects the momentum and can lead to financial losses or, in some cases, the collapse of the deal altogether.
Legal and compliance risks
Inadequate legal review can expose companies to post-transaction legal disputes or compliance issues, consequently leading to financial penalties or reputational damage.
Lack of legal expertise: ineffective negotiation of terms
A less experienced legal team might need to pay more attention to critical elements in SPA negotiations, leading to favorable terms for their client.
Over the last six months of my professional journey, I have been directly involved in three due diligence processes over the last six months, two on the sell-side and one on the buy-side. The experiences with the legal firms selected by our clients on the sell-side were commendable. Their proficiency facilitated a rapid and smooth progression through the due diligence stages. On the buy-side, however, our experience contrasted due to the sell-side’s choice of legal advisory. This choice resulted in delays in the review of contracts and the procurement of essential annexes, which were the seller’s responsibility.
Furthermore, the counterpart’s legal representation engaged in excessively meticulous and unnecessary negotiations over every detail in the contracts proposed by our team, often needing more substantive justification. This significantly slowed the process and introduced a level of friction that a more pragmatic legal team could have avoided. This contrast in experiences highlights the impact that legal support can have on the outcome of M&A transactions.
You may be interested in reading our article: Negotiation is power when selling a business
Choosing the right legal partner: a key to M&A success
One cannot sufficiently emphasise the importance of selecting an appropriate legal team. A firm that boasts sufficient personnel and diverse legal specializations will ensure they carefully manage the deal. Moreover, a pro-business mindset is invaluable—select a firm that is committed to closing the deal, not one that stumbles over trivialities. It’s beneficial to choose a firm that engages in several deals per year and has an extensive track record, sometimes even requiring industry-specific expertise.
The cost consideration and incentive alignment
When considering legal advisory costs, remember that the cheapest option may become the most expensive in the long term. A low-cost advisor may need more resources or expertise to properly navigate complex M&A landscapes, leading to costly delays or oversights. Instead, the decision should be based on a balance of cost, expertise, and the firm’s track record.
Additionally, consider the payment structure when engaging a legal firm. A milestone-based payment system aligns the incentives of the legal team with your goal of closing the deal. This approach motivates the legal team to focus on progress and results rather than prolonging the process.
Final thoughts on the role of expertise in M&A deals
Choosing a firm with extensive mergers and acquisitions legal expertise is a strategic decision that can significantly influence the deal’s outcome. By selecting a firm with the right expertise and approach while aligning incentives through milestone-based payments, you further set your transaction up for success. A skilled and motivated legal partner is not just a supplementary choice but a foundation of a successful M&A transaction. In conclusion, from ensuring compliance and precision in documentation to negotiating contract terms, the right legal partner accelerates the transaction and mitigates risks. This ensures a smoother transition and a more secure deal for all parties involved.
Strategic collaborations in legal counseling
At ONEtoONE, although we do not directly provide legal advisory services during M&A processes, we understand the importance of efficient legal representation. Therefore, our clients are free to engage specialized legal counsel in each jurisdiction where a transaction takes place. Nonetheless, we strengthen their position by maintaining consolidated relationships with various renowned legal firms. We actively suggest to our clients to consider working with these firms, trusting in their proven expertise and alignment with the quality standards we promote at ONEtoONE.
About the author:
Simón Restrepo Barth, Professor of Finance, Board Member, Investment Banker. Partner of ONEtoONE Corporate Finance. Master in Finance from Universidad de los Andes. Certificate in Advanced Valuation with high honors at NYU | STERN, a certification in negotiation from Harvard University and a certification in Real Estate Investment Strategies at Columbia Business School.
This article was written with the assistance of AI tools.
ONEtoONE Corporate Finance is a global advisory firm specialising in the sale and purchase of companies in all sectors. Our successful experience with more than 1,700 mandates supports us in advising on any issue related to the details of transaction closings.
If you are interested in considering the sale of your business and need professional advice, please do not hesitate to contact us. The window of opportunity is open – we’ll help you get through it!