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Mergers and acquisitions, also known as M&A, is a complex process that has become a more frequent occurrence for businesses in a post-pandemic world. While there is quite a bit of information out their surrounding the necessity of legal entity management as it pertains to entities and subsidiaries. We want to help you look at the big picture and provide some contextual information that can help you understand why a sound legal entity management system is a necessity for procuring the best M&A deal. Here are six reasons that we found.
Your company’s maintenance of its entities’ corporate records is a reflection of its credibility. A business who hasn’t exercised care in doing so can ultimately appear untrustworthy and disorganized. Buyers may wonder what other problems they may be buying into with this deal if corporate records couldn’t bother to be organized.
Research from a Deloitte Legal Business Services study of M&A attorneys revealed that poor legal entity management caused buyers to either believe that a company’s legal team was inept or trying to hide something. On the other hand, a business team that maintains its records in an organized fashion gives a buyer more confidence in the buying process and the organization as a whole.
When businesses fail to engage in thoughtful, diligent legal entity management, deals can be slowed down or even ended before they begin. Buyers need to be able to evaluate a transaction quickly, which requires them to quickly trace each subsidiary’s capital structure, ownership, options, and voting rights.
Poorly organized minute books can lead to uncertainty about who owns and rules each subsidiary and May ultimately diminish the willingness and ability of attorneys to write opinion letters that are required by financiers. The more thoroughly a business performs due diligence, the quicker the deal timeline can be accelerated and the less likely a buyer will be to pull out last minute due to disorganization.
Sellers must be able to show who owns what subsidiaries and get independent verification during the independent verification process. This should be recorded in purely factual due diligence memos. If an insurance company finds that these records do not clearly tie out the capitalization of each subsidiary, the insurance company may refuse to underwrite the risk for the transaction.
As a result, buyers may have to ask sellers for indemnification, causing buyers to rethink deal prices. Some buyers may even walk away from the deal because they may question how the seller’s company has been run. Sometimes, buyers are even stuck with fines related to personal liability if a buyer has not kept up with the entity’s legal obligations prior to the deal.
Questions that arise about entity management can have serious consequences for both the buyer and the seller. For starters, the buyer risks significant exposure and embarrassment should it come out that their entities have not been managed carefully. As a result, the buyer may try to make the deal for a lower price. Remember, deals are priced with the assumption that entity management is adequate and records have been managed and organized in a certain manner. Additionally, an improperly structured entity can negatively impact both parties’ ability for certain tax advantages.
As we mentioned above, organized entity management can have tax advantages for both the buyer and the seller. From the buyer’s perspective, these advantages can provide extra incentive to make a deal. On top of that, well-managed companies provide buyers with better deal structuring options. For instance, buyers who have a clear picture of the subsidiaries’ statuses may be more willing to move forward with the deal.
On the other hand, buyers who are not comfortable with the status of subsidiaries may not be willing to accept the potential liability that would be on their plate post-deal. Poor entity management can also raise questions about the company as a whole, providing another way for the deal the go awry.
Lastly, while a smooth deal transaction should never encounter extravagant legal fees, that’s exactly the type of thing that occurs when poor legal entity management is a part of the equation. Unfortunately, buyers often underestimate both the hassle and the cost of remediation until after the deal is made. They may also force sellers to escrow funds for any entity management-related cleanup that needs to be done.
Buyers will want to verify each aspect of the corporate structure, but failure to have the proper documentation can mean each piece of information needs to be sorted and reviewed independently, a process that can be costly and time-consuming. Either way, unnecessary costs are put on either the buyer or the seller without even a satisfactory outcome guaranteed. Additionally, lawyers often have to come in midway to sort out any details and help put the pieces together for both parties, which can result in additional fees.
At Athennian, our cloud-based entity management software is the tool that you need to stay deal ready and prevent negative financial repercussions during your next M&A transaction. If you would like to learn more about what we offer, contact a legal entity management expert on our team today for a free customized demo! We will guide you through our software program and all of its features.
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"Very easy to use, modern interface, excellent support. Athennian has an amazing conversion team. They helped us migrate all of our data and the training was very good."
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“When we were reviewing other entity management systems on the market, in some cases, we were not comparing apples to apples. But with Athennian, there was really no comparison. The paralegals were so excited to come on board.”
"There are so many things I like about this program, but the one thing that really stands out is the user friendly interface. The program is fast and allows me to enter corporate information very quickly and efficiently. I would also like to note that Athennian provides the most the fantastic customer service."
