Economical M&A: How New Technologies and Simple Choices can Make Buying and Selling a Small Business Affordable
In any small business acquisition, legal costs can become a significant drain on the transaction’s value. All too often, after a deal is closed and the attorneys present their bills, the attorneys’ clients suffer real sticker shock at the cost of the transaction’s legal work. The clients may even give their attorneys an angry call to ask how the cost got so high. Accustomed to such complaints, the attorneys will likely give the customary answer in response, “Regardless of whether the transaction is valued at $1 million or $1 billion, counsel has the same onerous tasks of negotiating the purchase agreement and ancillary documents and managing the legal due diligence.” These two tasks are traditionally time-intensive activities for legal counsel (and therefore, expensive for the business parties).
During negotiations, counsel, facing a never-before-seen draft purchase agreement, customarily parses each section, word, and even comma of the draft to spot where and how the other side crafted the document to their advantage. During due diligence review, counsel sifts through hundreds if not thousands of contracts, records, policies, and other business documentation produced by the target company, combing for information required under the purchase agreement and anything that may impede the transaction. Even if counsel sources the legal work to their most cost-efficient staff members, these time-and-labor intensive methods of negotiation and due diligence produce hefty invoices.
In cases of small businesses with customary commercial relationships, well-kept books and records, a cooperative counterparty, and a desire by their owners to save money, new technologies and strategic choices offer a way to achieve accurate and effective legal counsel in due diligence, drafting, and negotiation, all for a fraction of the traditional cost.
Starting the transaction with a transparent and standardized form can reduce the review and negotiation costs associated with drafting the purchase agreement. When the deal parties use transparent, standardized, and accessible forms (so the attorneys already know or trust the details of the form before drafting and review begins), each side does not need to analyze the draft word by word. Instead, counsel can focus its review of a draft purchase agreement substantively on the places where there is (or needs to be) variation away from the standardized form.
The proliferation of forms by big-name online legal research publishers (such as Westlaw with Practical Law) makes finding and applying a standardized form to a small business acquisition easy. These forms, kept up to date by experts to match legal and market changes, constitute a straightforward starting point for drafting the purchase agreement, and many merger and acquisition (M&A) attorneys will already be familiar with such forms (and will have confidence in their applicability and currency).
This approach to drafting can also preserve goodwill between the parties as negotiation is reserved for meaningful and fully disclosed issues, rather than treating every drafting issue as a trap. Business parties should work with counsel at the beginning of the transaction—during the negotiation of the letter of intent or similar document—to ensure that everyone on the deal team agrees on the standardized form that the attorneys will use when drafting and negotiating the purchase agreement.
Advances in machine learning (and particularly in natural language processing) offer business parties huge savings for M&A transaction due diligence. During the last few years, technology firms focused on artificial intelligence have exploded onto the legal scene, including those with M&A transaction applications. For M&A due diligence, these technology firms use machine learning algorithms with natural language processing (trained on M&A contract language) to “read,” analyze, and quantify all the contracts, records, policies, licenses, and other business documentation provided by the deal parties for legal review. After “reading” the business documentation, the algorithms identify the information required for disclosure under the purchase agreement and any hidden legal pitfalls buried within the piles of due diligence paper, which the parties should resolve before closing the transaction.
Within minutes of computer processing, counsel can review and get answers on all due diligence documents using machine learning tools instead of trying to get the same answers by spending days of manual review. Forty-five minutes of computer processing versus twenty hours of first-line attorney review (billed at hundreds of dollars per hour per reviewer) provides business parties with meaningful savings when it comes time to tally the transaction costs of an acquisition.
Artificial intelligence also increases the accuracy of the M&A due diligence review. Artificial intelligence managed by proficient counsel achieves greater accuracy in spotting relevant contract provisions than that achieved by elite attorneys doing so manually (who, being human, may be prone to mistakes, distractions, or even bouts of fatigue). Plus, by applying machine learning, counsel can inexpensively and quickly respond to changes in the business terms or environment as a transaction progresses. For example, if the business parties suddenly realize, at the eleventh hour, that they need to look into the ISO compliance requirements of all the selling entity’s contracts to close the transaction, counsel using artificial intelligence can adjust the algorithmic parameters to get the required answer quickly instead of waiting two business days for attorneys (each with their billing timers ticking away) to come up with the same conclusion by manual review.
By using a transparent and standardized starting form for the purchase agreement and applying natural language processing technology to the due diligence materials, the two most expensive elements of an M&A transaction can be significantly reduced in terms of actual costs incurred. From the onset of a deal, small business owners looking to reduce transaction expenses should consult with attorneys with the requisite experience and tools to employ these cost-saving strategies.
At Kirton McConkie, we have both the technological resources (access to digital libraries of standardized forms and deployment of cutting-edge artificial intelligence software to M&A transaction due diligence) and the skilled professionals (attorneys of all levels with training and experience in applying these technologies to an acquisition) to help small business owners achieve affordable transactions. From junior attorneys rapidly reviewing your business documentation using machine learning programs to senior attorneys negotiating the standardized form of purchase agreement in a streamlined manner, the professionals at Kirton McConkie will help you buy or sell a small business while minimizing transaction costs.