Due Diligence in M&A Transactions in Germany and France

Due diligence is a systematic review of a target company before a contemplated transaction. Its purpose is to identify material risks and opportunities associated with the target and provide the buyer with a sound basis for its acquisition decision.

The review may identify potential liabilities, financial obligations, contractual commitments, tax, employment or regulatory risks, as well as other matters that could affect the value or operation of the target company.

The findings of the due diligence may therefore influence whether a transaction proceeds, the purchase price, the structure of the transaction and the contractual mechanisms used to protect the buyer.

Our M&A lawyers advise companies and investors on the preparation and implementation of due diligence processes in Germany and France.

The scope of due diligence depends in particular on the size and activities of the target company, the structure of the transaction and the risks identified at an early stage. Several review areas are commonly combined.

Due diligence may include in particular:

• Legal Due Diligence covering the legal affairs of the target company;
• Tax Due Diligence to identify tax risks and liabilities;
• Financial Due Diligence analyzing the financial position and key financial indicators of the target;
• Commercial Due Diligence assessing the business model, market position and commercial prospects of the target;
• employment and human resources due diligence;
• regulatory and compliance reviews;
• depending on the business, reviews relating to IT, data protection, intellectual property, environmental matters or other specific areas.

At the beginning of the process, the scope, priorities and timetable of the due diligence are defined. Factors such as the size and structure of the target company, its industry, the contemplated transaction structure and the buyer’s commercial objectives are taken into account.

The documents required for the review are usually made available in a virtual data room. The buyer’s various advisers can then analyze the information relevant to their respective areas of expertise. Additional questions are submitted to the seller or its advisers where documents are missing or further clarification is required.

Depending on the size and complexity of the transaction, the findings may be summarized in a comprehensive due diligence report or in a so-called red flag report. A red flag report focuses primarily on matters that may have a material impact on the acquisition decision or the subsequent negotiation of the transaction documents.

Our lawyers coordinate the legal review and, where appropriate, align their findings with those of the other advisers involved in the due diligence process.

In a Franco-German acquisition, the legal and economic characteristics of both jurisdictions must be taken into account. Corporate documentation, employment structures, commercial contracts, regulatory requirements and internal decision-making processes can differ significantly between Germany and France.

Particular attention may be required with regard to ownership and representation structures, employee representation, key customer and supplier contracts, financing arrangements, regulatory approvals and existing liability risks.

Tax and financial matters must also be assessed within the relevant national framework. In a cross-border transaction, it is therefore important not to consider the findings in Germany and France separately, but to combine them into a coherent transaction strategy.

Our German and French lawyers advise on due diligence processes in both countries and coordinate the legal review of cross-border acquisitions in an integrated manner.

Due diligence is not limited to identifying risks. Its findings regularly have a direct impact on the further structuring and negotiation of the transaction.

Identified risks may, for example, be reflected in the purchase price or addressed through representations and warranties, specific indemnities, purchase price adjustments, conditions precedent or particular undertakings by the seller. In some cases, it may also be appropriate to modify the transaction structure originally contemplated.

The findings of tax, financial and other due diligence workstreams may also affect the economic terms of the acquisition. The various findings should therefore not be considered in isolation but should be brought together when negotiating the acquisition agreement.

Our lawyers advise throughout the M&A process, from due diligence and transaction structuring to contract negotiations, signing and closing.

Due diligence and company valuation are closely connected but serve different purposes. Due diligence examines the target company and identifies its principal risks and opportunities, while company valuation seeks to determine the economic value of the business and provide a basis for determining or negotiating the purchase price.

The findings of the due diligence may have a significant impact on the valuation of the company. Additional liabilities, legal or tax risks, dependence on key customers or suppliers, employment-related obligations or other economically relevant factors identified during the review may affect the assessment of the target company’s value.

Different methods can be used to value a company. Depending on the transaction, these may include discounted cash flow methods, earnings-based approaches and market-based valuation methods using comparable companies or transaction multiples. The appropriate methodology depends in particular on the structure, industry and financial position of the target company and the purpose of the valuation.

Where required, we carry out the company valuation together with specialized cooperation partners. We coordinate the legal findings of the due diligence with the relevant economic and financial valuation parameters and take the resulting conclusions into account when structuring the transaction, negotiating the purchase price and drafting the acquisition agreement.

Due diligence is not conducted exclusively on behalf of the buyer. In a vendor due diligence process, the seller arranges for the target company to be reviewed before or during the sale process.

This approach can help identify legal, tax, financial or other risks at an early stage and, where possible, address them before potential buyers are approached. It can also help organize the information to be provided to prospective buyers and make the subsequent sale process more efficient.

Vendor due diligence can be particularly useful in larger or more complex transactions, competitive auction processes and cross-border company sales involving several potential buyers.

Our lawyers advise sellers on the legal preparation of vendor due diligence, the organization of the data room and the coordination with other advisers involved in the process.