Mergers and acquisitions (M&A) are complex transactions involving a wide array of financial, legal, and operational considerations. The M&A process requires a deep understanding of various business disciplines, with financial and legal advisors working in tandem with the goal of ensuring the deal proceeds smoothly. Clients rely on their professional advisors for this information, which is often not understood by all parties, sometimes resulting in a lack of overall deal cohesion. This disconnect may exist because financial professionals may struggle to fully grasp the technical contractual nuances of M&A, while conversely legal professionals may find it difficult to understand various technical accounting and financial nuances. This article examines the reasons behind this disconnect and explores possible solutions to improve collaboration and communication between these two critical groups of deal advisors.
1. Potential for Disconnect Between Financial and Legal Professionals in M&A
In the M&A realm, financial and accounting professionals are primarily responsible for conducting financial due diligence, analyzing, and developing valuation models and financial statements, and negotiating the parts of the deal related to these elements. On the other hand, legal professionals are primarily tasked with conducting legal due diligence, drafting contracts, negotiating legal terms, and ensuring compliance with regulatory requirements. While both groups play a vital role in M&A deals, their differing areas of expertise can lead to a lack of understanding and cohesion between them.
According to a 2019 study by Deloitte, only 42% of surveyed M&A professionals believed collaboration between financial and legal professionals was effective, with the majority citing a lack of understanding of each other’s roles and responsibilities as the primary cause of the disconnect (Deloitte, 2019). Furthermore, a 2017 survey conducted by Ernst & Young found that 75% of respondents identified misaligned expectations between deal parties as a major factor leading to failed transactions (Ernst & Young, 2017). These statistics highlight the pressing need for better integration and collaboration between financial and legal professionals in M&A transactions.
2. Causes of the Disconnect
A. Limited Understanding of Each Other’s Domains. The specialized nature of financial and legal professions means that individuals in each field may not have a comprehensive understanding of the other’s area of expertise. This can lead to misinterpretations and incorrect assumptions, ultimately hindering effective communication and collaboration.
B. Misaligned Objectives. Financial and legal professionals may have different objectives in M&A transactions. For instance, some financial professionals may focus solely on valuation while underappreciating that legal implications can result in financial losses for the client. Conversely, some legal professionals may overly prioritize risk mitigation and regulatory compliance while failing to appreciate the overall financial picture. Regardless, these divergent goals can create tension and impede cooperation.
C. Inadequate Communication. In the fast-paced world of M&A, effective communication is paramount. However, professionals in different disciplines often use jargon and terminology unique to their fields, sometimes making it difficult for the other party to fully understand the intended message.
D. Insufficient Training. Financial and legal professionals often receive specialized education and training, with limited exposure to the other’s discipline. This lack of interdisciplinary training can exacerbate the disconnect between the two groups.
3. Some Examples of Negative Implications Due to the Disconnect
A. Inadvertent Inclusion or Exclusion of Key Financial Terms. The accounting and financial provisions of the acquisition agreements (such as around working capital and EBITDA based price adjustments) sometimes inadvertently include, exclude, or misapply key components because the nitty-gritty of the acquisition agreements failed to capture, describe, or apply them correctly, whether because:
- The financial professionals (1) didn’t look closely at the contractual provisions, (2) didn’t understand the contractual provisions, or (3) didn’t otherwise closely coordinate with the attorneys; AND/OR
- The legal professionals (1) didn’t look closely at the financial statements and calculations underlying the key financial and accounting provisions of the acquisition agreements, (2) didn’t understand the basics of the accounting and financial information, or (3) didn’t otherwise closely coordinate with the accounting and financial professionals.
Remember, spreadsheets and financial statements aren’t contracts, but the contracts must accurately reflect what’s in those spreadsheets and financial statements. And it takes some work and thought to make sure they’re properly integrated when it comes to the volume of financial and legal information underlying any M&A deal of size. The most pristine spreadsheets and financial statements are only as good as the acquisition agreements that interpret and apply them.
B. Allowing the Deal to be Over-Lawyered. People often talk about over lawyering in M&A deals, but they don’t always do enough to prevent it. Lawyers for institutional and private equity buyers tend to overdo it, and financial professionals and lawyers don’t always work together closely enough. This can lead to lawyers sometimes making changes to the contracts that hurt the other side, for example, even if they weren’t agreed upon. Sometimes, high-level financial executives just say they’re following the advice of their white shoe law firm without considering the actual business case. Many non-legal professionals aren’t comfortable with the technical details of contracts, so they may rely too much on what their lawyers tell them. This problem can be exacerbated when the financial and legal professionals are not collaborating as closely as they should.
4. Bridging the Gap: Solutions for Better Collaboration between Financial and Legal Professionals in M&A
Some strategies for M&A principals to consider in seeking solutions for better deal collaboration between financial and legal professionals include:
A. Engage Professionals with Cross-Functional Experience or Backgrounds. When vetting their prospective deal teams, M&A principals should understand and inquire about the cross functional training, if any, that their professionals possess. For example, does your M&A attorney have prior hands-on experience in entrepreneurship, business management, accounting, or finance, and so on for the various types of deal advisors involved in the transaction? The more practical and hands-on experience a member of the deal team has had in one or more areas of other professional disciplines involved in the transaction, the better. Advisors with such cross-training experience will undoubtedly have a more holistic understanding of the deal elements than those who have no real experience or training outside of their individual professional domain.
B. Ensure Properly Coordinated Communication Throughout the Process. Insist on regular communication between financial and legal professionals throughout the M&A process. This should include scheduled meetings and the use of shared language and terminology to ensure both parties understand each other’s (and most importantly, the client’s) perspectives and goals.
C. Clarify Roles and Responsibilities. Clarify each party’s roles and responsibilities at the beginning of the deal. This will help to ensure that everyone understands the scope of the work and can work more effectively. It may also shed light on incorrect assumptions each party is making about what the other is truly doing and identify gaps or oversights that might otherwise fall through the cracks.
D. Develop Mutual Understanding of Deal Components. Financial and legal professionals need to have a mutual understanding of the key deal components. This can be achieved by ensuring they both review the same financial and accounting information, as well as the same contractual terms, and by discussing any discrepancies. This is not to suggest they should replicate the other’s work, or that financial advisors should be the lawyers, or the lawyers the financial advisors, etc. The point is to ensure through reasonably coordinated collaboration and discussion that the attorneys properly describe and implement the intricacies of the accounting and other financial components in the acquisition agreements consistent with the overall deal intent, and conversely that the financial professionals spend the time necessary to reasonably understand and confirm the legal terms in fact truly reflect those intricacies. This collaboration should involve more than just taking the other’s word for it.
E. Build Trust. Trust is essential to any successful working relationship. Building trust between financial and legal professionals can be achieved by creating opportunities for both parties to get to know each other on a personal level, particularly at the outset of the deal, whether through a social event or even just an informal meeting. This can help develop rapport. By building trust, financial and legal advisors can work together more effectively, which can ultimately lead to more successful deal outcomes for clients.
In conclusion, bridging the gaps between financial and legal advisors is critical to ensuring the success of M&A deals. The specialized nature of these professions can lead to a lack of understanding and cohesion between them, but by implementing solutions such as proper vetting of interdisciplinary skills, coordinated communication, clarifying roles and responsibilities, developing a mutual understanding of deal components, and building trust, M&A professionals can work together more effectively. By doing so, they can ensure that deals proceed more smoothly, benefiting clients and their businesses. Ultimately, it’s the responsibility of all parties involved in M&A transactions to prioritize collaboration and communication, striving towards common goals and a shared understanding of the complex and intricate elements of the deals they undertake.
At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.