M&A Activity -- Expect a Surge in Mergers
The LOI will propose a negotiable standstill period, which is ordinarily somewhere between 30 and 120 days, with 90 days being the normal period. During this period the seller agrees to permit due diligence investigation under certain conditions and to negotiate only with the buyer. Sellers who violate the standstill agreement can be sued.
Most buyers will require on-site due diligence visits by its management, lawyers and accountants. This task can consume from one to three weeks and is usually exhaustive. The buyer will examine all of the current and fixed assets, internal books and records, contracts, leases, any existing litigation and any unrecorded liabilities. A list of required due diligence materials can number in excess of 100 items. Buyers who find a significant, unreported liability will understandably seek to adjust their offering price.
The buyer will present a draft Purchase Agreement shortly after the mutual signing of the LOI. The seller should realize that the buyer's attorney will prepare and negotiate the agreement, and he or she is usually a highly experienced M&A attorney. The seller should, likewise, engage a seasoned deal attorney since the first draft of the Purchase Agreement is usually decidedly in the buyer's favor.
Closing and Funding
When due diligence is complete and when the attorneys have negotiated a mutually acceptable Purchase Agreement, the transaction is ready to close and fund. A delay can occur if the buyer has a financing contingency and has not yet obtained his lender's firm commitment. Large publicly traded strategic buyers rarely have a financing contingency, since ready cash or an existing credit line are adequate to finance the deal. Financing contingencies usually arise in deals with Financial Buyers. Closing and funding the deal usually occur on the same day.
Learn the Language Of M&A Deals