Due Diligence & Legal Audit

Articles
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For many private business owners with strong annual earnings the ultimate retirement plan or exit strategy is to sell their business to a strategic buyer or private equity firm for a high multiple of earnings.  It is not unusual for such business owners to think that once they achieve attractive EBITDA numbers for three to five years running, they are ready to go to market and achieve premium pricing.

In reality, good financial metrics are table stakes in the M&A game. Sophisticated buyers conduct comprehensive due diligence on all value drivers to assess the merit of a transaction and determine price. Some of those value drivers include commercial and operational synergies, growth potential, intellectual property, human capital, risk management and legal profile.

For the selling business owner, a pre-sale legal audit is a critical component of any successful preparation and planning strategy. The process involves conducting the same legal due diligence on the business that will be conducted by the lawyers of a sophisticated buyer. During the legal audit process, the legal deficiencies, issues and risks that would be uncovered by a buyer’s lawyer are identified and, in consultation with the selling business owner and his or her other professional advisors, remedied or mitigated.

There are numerous benefits to conducting a pre-sale legal audit, including:

  • avoiding unwanted surprises during buyer’s due diligence by identifying problems before the buyer does;
  • having sufficient time to remedy or mitigate problems;
  • maximizing the value of the business or, at the very least, avoiding a price renegotiation;
  • ensuring the business is operating in accordance with applicable laws;
  • preparing and organizing due diligence materials for the sale process; and
  • enhancing the credibility and negotiating position of the selling business owner.

A strong, well organized legal profile is an important value driver and it is essential for a successful transaction. Over the years we have seen a number of failed transactions and price renegotiations as a result of material legal issues being discovered during the due diligence phase. If you are a business owner contemplating a sale, contact us about conducting a legal audit on your business.