Why You Need CLM for M&A Due Diligence

Going through mergers and acquisitions is a powerful strategy for market domination. Two companies uniting their product lines and updating the solutions they offer their customer base is a smart way to get ahead of the competition. 

But M&A activity can also be hectic, especially when a company is disorganized. Companies that don’t undergo M&A activities regularly can quickly find themselves overwhelmed when performing due diligence, the most necessary evil. 

Due diligence is essentially the process of kicking the tires and checking the fitness of the company being bought. It uncovers the financial standing of the company, whether or not there is any pending litigation, and if it has a low to moderate risk profile. But when documents are scattered all over the place and contracts are mismanaged, due diligence can become an enormous pain.

That’s why Contract Lifecycle Management (CLM) software is a crucial part of M&A activity. Not only does it get your contracts in good working order, but it also provides necessary insights into customer base and revenue performance, painting an accurate picture of the business being purchased. Here are 4 ways CLM can help with due diligence.

Check for Inconsistencies in Contracts

Manually executing contracts makes them more prone to inconsistencies like missing or outdated clauses. For example, some MSAs might not include accurate terms about dispute resolution, and some of your legacy contracts might have variable termination clauses. This inconsistency can increase the risk profile of the merged companies. Without  CLM, it’s impossible to know which is which without combing through each contract manually.

But with a CLM solution, you can keep all your contracts in a centralized location and check for inconsistencies more systematically. Contract management AI is especially powerful, as it can check for irregularities that you might not be able to catch on your own. And by providing a high-level overview of what’s actually inside your contracts, CLM makes it easier to amend your agreements without exhausting your legal teams. 

CLM enables you to automate these tedious due diligence processes so that your contracts are an accurate reflection of your business.

Understand Sales Volume and Contract Value

Before purchasing a company, you want to make sure that it is a good financial investment. After all, what’s the point of buying a company that doesn’t bring in sales or have any market presence to speak of? Checking deals closed and transaction volume is crucial to your due diligence process. Failure to do this can mean buying a company that is worth less than it costs. 

This is why acquired companies have to turn over their financial and accounting information. But CLM can paint a stronger picture of the strength of the business by supplementing financial records and giving context around business transactions and average contract value.

CLM software tracks and records data around deal volume, sales velocity, and contract value. With data on how long it takes to execute a contract and a calendar view of renewal and termination dates, CLM provides insight into transaction volume over time and allows you to accurately forecast future business.

Account for All Business Contracts

Aside from knowing the status of contracts with your existing customer base, due diligence calls for a full view of contracts with vendors and other business partners, too. Unfortunately, it’s all too common for companies to be unsure of where their agreements are, especially those signed on third-party paper. 

Since a merger and acquisition consolidates business resources and assets, it’s important to have an accurate view of existing contractual relationships. For example, what are the terms of your existing real estate contracts? What licenses and subscriptions are active and for how long are they valid? Are there existing or pending contracts with the government?

The great thing about CLM is that it houses all your contracts, not just your customer-facing agreements. Even more, it tracks crucial contract data about termination and renewal terms, so you never enter a business deal blind. Managing all transactions — both incoming and outgoing — for due diligence is easier with an end-to-end contract management solution.

Assess Contract Compliance 

Part of knowing the status of existing contracts is knowing whether or not they meet compliance standards. These vary across industries and can differ based on the size of the company. For example, a large pharmaceutical company will have different compliance standards than an SMB SaaS organization. So when a large company acquires a startup, for example, it’s crucial that the agreements they inherit meet the necessary compliance standards. 

This includes checking whether or not a contract is at risk for a breach. Before you acquire a company, it’s important to understand whether or not they are meeting contractual obligations. Otherwise, you run the risk of inheriting liability that will cost you in both the short and long term.

CLM software comes with a searchable repository that allows you to double-check contract obligations, the clauses that introduce risk, and whether or not specific compliance standards are met. Armed with this data, you can make a more informed decision about moving forward with the M&A and what changes need to be implemented to ensure compliance going forward.

Takeaways

CLM makes due diligence easier and less time-intensive. By centralizing your agreements, contract management software provides a comprehensive view of the health of your contracts, as well as insight into critical information about existing business agreements. Even better, the benefits don’t just stop pre-acquisition — after the companies (and their contracts) have merged, a joint CLM solution means you can continue to execute and store your contracts using best practices, making future due diligence processes relatively painless.

Take it for a test drive — request a demo of LinkSquares today!