So I work for a company founded by an M&A lawyer who left big law specifically because of the pain and drudgery of the due diligence process.
I hear the war stories constantly. Boxes of contracts, weekends of work, insanely tight deadlines and bleary-eyed reviews. So we built a technology that is designed to help assist with the process of reviewing contracts, identifying key information in them and surfacing the most important parts in useful, effective ways.
So I recently found myself wanting to understand how big a problem this really was? How many people are impacted by the issues my team faced? What does it cost businesses. And here are some thoughts.
A recent survey by Ansarada of over 500 M&A dealmakers found that half of them were hoping to close twice as many deals as they are currently completing per year. The study also stated that one quarter of those deal makers feel that the main cause of delayed transactions is the due diligence process.
So let’s unpack the diligence process. Why is it slowing things down?
This may seem obvious but let’s get some facts here -- there has been a staggering increase in the the sheer volume of contracts inside businesses. The average company has experienced a 20% increase in their number of contracts in just five years.
The average Fortune 1000 company is estimated to have tens of thousands of active contracts (and likely to also have tens of thousands of archived contracts).
Keeping track of these contracts is a challenge for the most well-run and organized operation. But what about small growing businesses? The ones you might really want to be watching and investing in? Their contract management programs tend to be even less well organized, meaning any diligence activity is going to be a potential nightmare of searching and review. Speed and volume aren’t the only challenges.
Delivering a speech at the annual meeting of the IACCM, CEO Tim Cummins cited the following research
Given the massive growth in the length and complexity of contracts, research shows that 88% of business users can’t understand their own contracts.
88% don’t understand their own contracts. We want to improve due diligence and we are grappling with a ton more contracts only to learn that organizations themselves don’t know what those contracts contain?!
So here’s a true story:
One of my clients told me recently about a key deal he was working on where the client handed him 10,000 contracts and asked him to help identify just a few specific data points. True to form, the client handed over the documents with very little understanding of what they contained. But they needed help. Fast.
So my client turned to technology. With the use of the latest contract analysis tools (okay, he used Kira), he was able to upload the entire set of documents in minutes. It wound up that out of the 10,000 documents, only 150 contracts that were relevant to the transaction. With that same technology (okay, he used Kira again), he was able to identify the key data points and pull them out so they could be analyzed separately for risks.
Why do I tell you this story:
Technology can help cut through the volume of contracts because the machine can process and “read” the contracts way faster than any junior lawyers. Technology helps eliminate the complexity of your contracts because it cuts through it and shines light on just the information you need to see. Technology makes it possible to identify risks and get expert risk assessments faster than ever before.
One last statistic:
In the 2016 M&A KPMG Survey, the top three factors for the success of a deal are a well-executed integration plan, the correct valuation, and an effective due diligence plan. Effective due diligence helps to reveal risks (and highlight any challenges or barriers to successful integration!). Successful deals require that everyone has the same understanding and expectation of any gnarly issues before deal close.
So here’s our issue -- the exact things that are getting harder -- contract complexity, contract volume, and transaction speed -- are the most important things to get right to close a successful deal.
In today’s business environment, with 88% of people confused by their contracts, 20% increase in volume of contracts, and a desire to halve deal closing times, we all need to do more with less. And you want to know that your deals are happening as efficiently as possible with no sacrifice in the quality of the analysis and information. This is no longer feasible to do this without technology-enabling tools (like Kira).