Doing own legal and financial due diligence as an attorney?
July 20, 2024
by a searcher from Boston University in Boston, MA, USA
Hi all,
I am writing to ask your opinion on whether a lawyer with a finance and corporate law background would be able to do their own Financial and Legal Due Diligence for a $10M deal?
My background consists of banking and financial Juris Doctor with a finance background as well. We have all the key documents templates I believe would be necessary including Purchase and Sale Agreement drafted by Goodwin Proctor.
The transaction is relatively simple with no inventory or equipment and large contracts with national corporate clients.
My initial lean was to hire an attorney to do all the legal work as well as another experienced team for the financial due diligence.
However, we wrote up an extensive LOO which seemed better than most I have come across ourselves. We began doing Lender Cover Sheets, Summary Pages, and financial projections and these were also outstanding. In our experience with brokers and other agents, we find that we end up picking up the slack and doing most of the extraordinary work to achieve an excellent result.
My question is:
Could someone with a finance and corporate law background (mostly securities regulations) complete the reasonable financial and legal due diligence and get to closing?
Also, I would recommend any legal and/or accounting practice guides akin to those given to any associates to be able to lookout for any potential issues.
I am looking forward to your views!
from Harvard University in Lynbrook, NY 11563, USA
1) On the financial side - If you're just talking about putting together financial models, that's no big deal. But if you're talking about the accounting side, I'm skeptical of you doing that on your own unless you have significant accounting expertise. You want someone with deep expertise to make sure the numbers check out.
2) On the legal side, I don't see why you can't do the first pass yourself and then determine if there are major issues you want another opinion on. I'd hope you've seen enough legal documents to spot the major issues. I think it's pretty common for searchers to do most of this diligence themselves anyways. One big exception is if there are any special regulatory concerns this business is subject to, in which case you def should get a specialist review.
3) I would not compare a broker/agent to an experienced financial or legal professional. Each is being compensated for different skill sets.
4) Candidly, I'm not sure what to make of your saying that you have all the "key document templates" including a PSA from Goodwin. That's like saying you have a samurai's sword and so you're ready to be a samurai. A good precedent is very helpful, but you need to know how to use it and how it works (and it may or may not fit your deal). Also bear in mind that if and when you do bring in a lawyer, dumping another firm's precedent on your lawyer may make him/her take MORE time not less. Reviewing someone else's paper I find takes me far longer since I need to master a whole new complicated document before even starting revisions.
5) As Felix mentioned, it's usually a good idea to have someone handling negotiations for you, both because it puts someone with emotional distance between you and seller and because you want to preserve a good relationship with seller for after closing.
In brief, I'd say you can probably do a lot of this yourself, but I wouldn't cheap out over here when you have 10M on the line, so would def get people involved where necessary.
Also, if you want a purchase agreement template with drafting notes that explain each provision, email me what the deal structure is (asset purchase, stock purchase, LLC purchase etc.) and I'll send you one. Can also send you some diligence materials. redacted
from Massachusetts Institute of Technology in Houston, TX, USA
If this were a tiny deal, then MAYBE I'd consider something like you're proposing. But it's a $10M deal, which is nothing to sneeze at. If I were considering an investment, I would run quickly away once I found out you're planning to do your own DD and legal work. Will you be personally guaranteeing any loans? If so, you're assuming personal bankruptcy risk to save a bit of upfront money? Even if no PG, you're increasing the risk with no commensurate increase in return (except, again, minor upfront cost savings).
I've dealt with counterparty attorneys who are not M&A professionals, and it's almost always unpleasant. Not because they aren't smart or competent in their respective field, but because they don't have the level of nuanced understanding and transaction reps to mitigate risk for their client and efficiently move through a deal process.