Mergers and Acquisitions (M&A) represent one of the most common exit paths for small businesses. Often early stage startups will be snapped up by larger Series B or Series C companies that are looking to open up a second or third product line in the form a smaller, faster growing company in a similar space. On the flip side it is one of the best strategic paths companies may take to expand their footprint, diversify their portfolio, or achieve other business objectives. Understanding the role of contract management in mergers and acquisitions will help you get ready.
The complex and demanding process of contract due diligence is riddled with potential pitfalls and risks that, if not managed properly or prepared for properly, can compromise the success of the entire transaction. An often-underestimated component of successful acquisition from the perspective of the company being acquired is effective contract management. In this post, we’ll explore the pivotal role contract management plays in navigating the M&A maze, getting your company set up with contract tracking early on and ensuring a smooth transition.
Preparing contract data for due diligence
The M&A process usually begins with due diligence, a crucial phase where potential risks and benefits of the deal are scrutinized. Contracts represent the lifeblood of this process. They hold invaluable information about obligations, liabilities, opportunities, and risks. Effective contract management here involves comprehensive review and analysis of all contracts – with customers, suppliers, employees, and other parties. The purpose is to uncover any potential liabilities such as penalties for early termination, change-of-control clauses, non-compliance risks, or any other contractual obligation that could impact the deal’s valuation or feasibility.
After the due diligence phase, contract management plays a key role in deal structuring and negotiation. Here, the contract information extracted from the signed PDFs informs the deal terms, including price, payment structure, and conditions precedent. Contract managers, equipped with knowledge about potential risks and liabilities, can help negotiate more favorable terms, protect the company’s interests, and ensure that contractual obligations are adequately reflected in the transaction documents.
Post-acquisition, contract management continues to play a vital role. Merging contractual obligations, harmonizing disparate contract management processes, systems, and standards can be a daunting task. A proactive contract management approach ensures the smooth transition of contracts, mitigating potential compliance risks. It facilitates the efficient consolidation of contracts, provides clarity about ongoing obligations, and helps establish unified contract management practices.
Post-merger legal actions
Additionally, post-merger integration often involves renegotiating contracts with suppliers, partners, or customers. Contract managers play a crucial role in these negotiations, utilizing their knowledge about the contracts to secure improved terms, ensure continuity of operations, and maintain good relationships with key stakeholders.
Furthermore, in the M&A process, maintaining business continuity is crucial. A well-managed contract lifecycle management system can identify critical contracts and ensure that they continue to be serviced appropriately during the transition period. This can help prevent service disruptions, uphold customer satisfaction, and ensure a steady revenue stream.
Finally, an overlooked but important role of contract management in M&A is its contribution to realizing synergies – the potential financial benefit achieved through the combining of companies. Contract consolidation, better terms through renegotiation, improved compliance, and enhanced operational efficiency are all synergy areas that effective contract management can drive.
Contract management can be one of the most time intensive parts of the M&A process. From due diligence to post-merger integration, effective contract management can uncover hidden risks, inform deal structuring, ensure business continuity, and contribute to synergy realization. Given these significant contributions, companies should ensure that they have put strong contract management structures in place early on in the business and it is not an afterthought but is integrated into the wider data management strategy from the outset. It may be the key to unlocking the full potential of the deal and ensuring the smooth transition of businesses. So, in your next M&A transaction, make sure that your contract management team is involved every step of the way. They may be the difference between an M&A that merely looks good on paper and one that truly delivers value.
How to organize your contract data
When you’re getting your SaaS startup ready for due diligence there will be a lot of hoops to jump though. But with preparation you can be ready for these. Particularly preparation in the form of organizing and presenting contract data. Contractual agreements with customers, vendors, employees, and other parties contain crucial information that potential investors, partners, or buyers will meticulously review. How you organize this contract data can significantly impact the success of the due diligence process and, ultimately, your startup’s future. This blog will explore how SaaS startups can effectively organize contract data for due diligence.
- Organize Your Signed Contracts: Start by taking stock of all your contracts. These might include customer agreements, service-level agreements, vendor contracts, employee contracts, intellectual property licenses, and any other contractual arrangements. A comprehensive catalogue aids in understanding your contractual obligations and commitments and ensures that no critical contracts are overlooked during the due diligence process.
- Create a Centralized Contract Repository: Centralization of contracts is a game-changer. It provides easy access, ensures continuity, and maintains contract integrity. Consider investing in a secure contract management platform that allows you to store, manage, and analyze your contracts. A digital platform not only helps in the organization but also enables easy navigation and quicker retrieval of contract data.
- Classify and Segment: Categorize your contracts based on their type, such as customer contracts, vendor contracts, employee contracts, etc. Further segmentation based on criteria like contract value, duration, renewal dates, and risk level can provide a clear overview and facilitate easy navigation for reviewers.
- Extract Key Contract Data: For each contract, extract the essential data points such as contract parties, term, pricing, scope of services, key obligations, termination rights, liability caps, and any unique or unusual provisions. This information is typically what due diligence reviewers will focus on. Having this data readily available will streamline the review process and make it more efficient.
- Highlight Risks and Liabilities: Be proactive in identifying potential contractual risks and liabilities. This might include unfavorable terms, early termination penalties, change of control provisions, and non-standard commitments. Highlighting these upfront can help manage potential issues and shows that your startup has a strong handle on its contractual risks.
- Document Compliance: Compliance with contractual obligations is crucial. Document any evidence of your startup’s compliance with its contractual obligations, including any performance metrics or standards specified in the contracts. This data will provide reassurance to potential investors or buyers that your startup is fulfilling its contractual obligations and managing any associated risks.
- Update Regularly: Contracts are not static documents. They evolve through amendments, renewals, terminations, and other changes. Make sure your contract repository is updated regularly to reflect these changes, ensuring that the data presented during the due diligence process is current and accurate.
- Secure your Data: Given the sensitive nature of the information contained in contracts, ensure that your contract repository is secure. Implement necessary cybersecurity measures and access controls to protect your contract data from unauthorized access or potential breaches.
Organizing contract data for due diligence can seem like a daunting task for a SaaS startup. However, with a systematic approach and the right tools, it becomes manageable. By effectively organizing contract data, you not only streamline the due diligence process but also gain valuable insights into your contractual obligations and risks. This knowledge can help you make informed decisions, manage risks better, and drive your startup’s growth and success.