Published By: Anita Tolani
Publication: Corporate Advisory Solution's February 2016 Newsletter
M&A Due Diligence: The Legal Perspective for Prospective Buyers
Mergers and acquisitions typically involve a substantial amount of due diligence by the buyer. This is a fact that is especially true in the collections industry. Every potential buyer in an M&A transaction should put forth a good faith effort to conduct due diligence to ensure that it knows what it is buying and what liabilities it may be assuming. The following non-exhaustive list highlights important due diligence categories for every prospective buyer to consider:
Publication: Corporate Advisory Solution's February 2016 Newsletter
M&A Due Diligence: The Legal Perspective for Prospective Buyers
Mergers and acquisitions typically involve a substantial amount of due diligence by the buyer. This is a fact that is especially true in the collections industry. Every potential buyer in an M&A transaction should put forth a good faith effort to conduct due diligence to ensure that it knows what it is buying and what liabilities it may be assuming. The following non-exhaustive list highlights important due diligence categories for every prospective buyer to consider:
Financial Information. Prospective buyers should review to confirm the existence of assets, liabilities, and equity in the balance sheet, and to determine the financial health of the target company based on the income statement. Financial information may also include a forecast of the profitability of the target company.
Legal Formation and Governance Documents. Every buyer should confirm that the target company and any subsidiaries are in good standing in the state of formation and any other states where the company or its subsidiaries conduct business. To do this properly the buyer must review the company’s charter documents which include organizing documents and amendments, bylaws and good standing certificates.
Compliance with Laws. A prospective buyer should request and review all debt collection license applications, renewals, and actual license copies, including all correspondence with federal and state regulatory agencies, audits and complaints. The buyer should also request information regarding pending investigations and government, regulatory and administrative proceedings, and information regarding consents or orders entered into against the target company for violations of law. Although collection licenses may or may not be transferable, it is important to ensure the seller had full compliance prior to the transaction.
Contracts. A review of all existing contracts, agreements and/or leases that the target company has made is necessary to understand any obligations that may be assigned to the buyer. This may include agreements with hardware, software and telephone company suppliers, agreements with communication providers, and service and lease agreements on equipment. Traditionally collection contracts are non-transferable and consent of the creditor is required.
Litigation. A buyer should request a list and brief description of litigation, arbitration and claims settled or concluded, including summaries or memoranda regarding all threatened, outstanding and concluded litigation and arbitration proceedings to which the target company or any subsidiary was a party during the last five years. The collection industry is a highly litigious environment and litigation is an unfortunate cost of doing business, therefore it is important to review threatened, outstanding and concluded lawsuits and claims.
Risk Management Documents. Buyers should also request and review a schedule of all insurance and liability policies of the target company. The review should include compliance with insurance requirements in collection contracts.
Due diligence is a tedious process that a buyer in any potential transaction must not take lightly and is the only time in a transaction that a buyer can prevent unwanted surprises later on.
Legal Formation and Governance Documents. Every buyer should confirm that the target company and any subsidiaries are in good standing in the state of formation and any other states where the company or its subsidiaries conduct business. To do this properly the buyer must review the company’s charter documents which include organizing documents and amendments, bylaws and good standing certificates.
Compliance with Laws. A prospective buyer should request and review all debt collection license applications, renewals, and actual license copies, including all correspondence with federal and state regulatory agencies, audits and complaints. The buyer should also request information regarding pending investigations and government, regulatory and administrative proceedings, and information regarding consents or orders entered into against the target company for violations of law. Although collection licenses may or may not be transferable, it is important to ensure the seller had full compliance prior to the transaction.
Contracts. A review of all existing contracts, agreements and/or leases that the target company has made is necessary to understand any obligations that may be assigned to the buyer. This may include agreements with hardware, software and telephone company suppliers, agreements with communication providers, and service and lease agreements on equipment. Traditionally collection contracts are non-transferable and consent of the creditor is required.
Litigation. A buyer should request a list and brief description of litigation, arbitration and claims settled or concluded, including summaries or memoranda regarding all threatened, outstanding and concluded litigation and arbitration proceedings to which the target company or any subsidiary was a party during the last five years. The collection industry is a highly litigious environment and litigation is an unfortunate cost of doing business, therefore it is important to review threatened, outstanding and concluded lawsuits and claims.
Risk Management Documents. Buyers should also request and review a schedule of all insurance and liability policies of the target company. The review should include compliance with insurance requirements in collection contracts.
Due diligence is a tedious process that a buyer in any potential transaction must not take lightly and is the only time in a transaction that a buyer can prevent unwanted surprises later on.