The present setting of mergers and acquisitions (“M&A”) is evolving. There’s fixed motion within the mortgage business with the need for development and enlargement. It’s simple to turn into blinded by the tip aim of accelerating mortgage quantity and high quality origination expertise. Thus, it has by no means been extra essential to give attention to due diligence in analyzing a mortgage business acquisition goal.
In a typical transaction, the due diligence guidelines will be overwhelming—pages upon pages in size. The guidelines covers such broad areas and matters as: organizational construction; litigation; compliance; mental property; actual property; monetary and tax; labor and employment; materials, vendor, and software program contracts; insurance coverage; and prospects. Below every key heading, the guidelines goes into nice element to uncover potential points that might devalue the enterprise, expose a purchaser to legal responsibility, and even jeopardize the transaction. This text is just not meant to be an all-encompassing evaluate of due diligence, however is supposed to handle some key M&A diligence areas and hold the subject top-of-mind.
Branding/Mental property: Commerce names, DBAs, and domains
Commerce names, DBAs, emblems, fictitious enterprise names or assumed enterprise names are what the world is aware of the enterprise as. If the identify recognition has worth or significance for future operations, you need to insure the identify or names are correctly registered inside every State the place the enterprise is being carried out or with the U.S. Patent & Trademark Workplace. A purchaser desires the appropriate to make use of these names and marks with superior title from the remainder of the world. The very last thing a purchaser desires is to seek out out after the deal closes that the founding father of the enterprise registered a reputation or trademark in their very own identify and by no means correctly assign it to the corporate. The identical is true of domains. Confirm the enterprise owns the area identify. Even when the intent is to not proceed to make use of an internet site, the customer desires to manage it to redirect future searches.
Regulatory compliance
The mortgage business is closely regulated and topic to scrutiny by each State and Federal businesses. This can be a potential minefield. Are there any pending or threatened investigations not extensively identified to the general public? Any information privateness breaches? Is the vendor topic to a probationary evaluate? Have complaints been submitted that might impression any licenses or “tickets” from government-sponsored enterprises? Is there a possible sample of questionable practices and actions primarily based upon allegations filed with authorities organizations? It’s not an understatement to say that any of the aforementioned questions being answered sure could possibly be a deal breaker. It’s typically simple sufficient to do an preliminary on-line search to search for crimson flags.
Materials contracts
There could also be quite a few contracts containing provisions that will set off legal responsibility or publicity upon the sale of a enterprise. One specific concern pertains to software program licenses. With the sophistication of the mortgage business, contracts with software program distributors are extraordinarily mandatory and dear. Key points embrace monetary penalties for early termination, restrictions on the project of the contract upon a change in possession of the vendor, and incompatibility for the switch of knowledge to a different system. Even when the customer makes use of the identical supplier, are they required to proceed to pay for a second license primarily based upon the vendor’s present contract. The contracts should even be reviewed to make sure applicable regulatory flow-down necessities for distributors. These points aren’t a consideration when the M&A discussions start, however it may considerably impression the ultimate buy worth with the intention to deal with an unexpected legal responsibility.
Key executives and staff
An apparent concern of the purchaser is the flexibility to retain key individuals. What about these individuals you do not need to maintain? Are these staff topic to non-competes, confidentiality and non-solicitation agreements? Are these agreements assignable to the customer? All these paperwork have to be reviewed. Additionally, have any staff been promised future fairness within the vendor? This could possibly be by a proper settlement or plan, in an employment settlement, and even an electronic mail. The acquirer desires to insure there aren’t any staff post-closing that declare they need to have been paid at closing or had been required to consent to the sale.
Miscellaneous/Conclusion
This heading of miscellaneous is misleading. All this stuff matter. Here’s a additional pattern of the quite a few detailed objects to look at throughout due diligence: (i) Trailing Mortgage Liabilities (Purchase Backs, Indemnity Agreements, Faulty Loans, EPO/EPD below MLSAs); (ii) Joint Advertising Agreements, Joint Ventures, Affiliated Enterprise Preparations, and different Important Enterprise Relationships; (iii) Workplace Revenue and Loss Agreements; (iv) Mortgage Pipelines; and (v) Safeguard and Procedures for Confidential Shopper Info – State and Federal Degree.
The satan is within the particulars relating to due diligence. It requires a staff to not solely perceive basic points which might be widespread to M&A, however members of the staff should perceive the business and its nuances. Don’t let the thrill of deal trigger anybody to hurry the method.
Gary M. Remer is a shareholder at Maddin Hauser. Gary focuses on mergers, acquisitions, joint ventures, franchising, tax, and worker advantages issues for companies throughout the spectrum, together with the mortgage business. He additionally serves as exterior basic counsel for his shoppers, helping with authorized and operational points.
Brian A. Nettleingham is a shareholder at Maddin Hauser. Brian’s monetary and mortgage companies business apply encompasses regulatory, transactional, and litigation issues, together with capital and secondary market transactions, mortgage lending and origination, reverse mortgage merchandise, correspondent packages, joint advertising agreements, and monetary vendor agreements.
This column doesn’t essentially mirror the opinion of HousingWire’s editorial division and its house owners.
To contact the editor answerable for this piece: [email protected].
