ComplianceMay 21, 2024

Strategic outsourcing in corporate transactions

As businesses continue to use mergers and acquisitions (M&A) to achieve their strategic objectives, gain new capabilities, and address emerging challenges, the deal-making process is becoming increasingly intricate. With competitive pressures, tight timelines, and greater regulatory oversight to contend with, dealmakers need to have a well-defined and organized plan for managing corporate transactions. 

Outsourcing aspects of M&A can help overcome these challenges while expediting and securing deal execution.

In this article, we explore why compliance is so critical during corporate transactions—for both buyer and seller—the benefits of outsourcing the process, what services to outsource, and what to look for in a service provider.

Impact of compliance on corporate transactions

To avoid issues, it is important to identify and address any potential compliance risks when engaging in corporate transactions. Any due diligence process must include Corporate Transparency Act (CTA) compliance in addition to lien searches, good standing and tax authority certificates, and other requests.

Unfortunately, compliance may not always be given the attention it deserves during pre-transactional due diligence. However, addressing any compliance concerns is essential to ensure that a potential deal is feasible and to protect the purchaser from any liabilities that may arise in the future. Moreover, when due diligence encounters minimal friction, the timeline for closing a deal can be accelerated.

Potential risks for the seller in a corporate transaction include failing to answer the buyer’s questions about the management of their target subsidiary. This can lead to additional probing of the deal, and time and money lost as the seller scrambles to locate records and close gaps in documentation. Moreover, lenders often require in-depth due diligence. If a seller can’t evidence beneficial ownership to the lender's satisfaction, financing may be delayed.

Several potential dangers and unforeseen issues can pop up during the deal for the buyer. To ensure a smooth and compliant M&A deal, buyers should follow best practices, such as verifying the entities involved, checking their good standing status, ensuring business license compliance, assessing the applicability of the Corporate Transparency Act, and completing necessary public records filings and post-merger responsibilities.

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Benefits of outsourcing for an M&A transaction

A service provider can deliver benefits at any deal stage or as needed for ongoing operations. Below are three key benefits of outsourcing to a managed sourcing provider in corporate transactions:

  1. Reduced costs while gaining access to a team of experienced professionals. A managed service provider can act as an extension of a company's internal team, providing immediate access to expertise that may not be available within the organization, specifically in legal processes such as regulatory compliance and the complexities of mergers and acquisitions. This allows employees to focus on other critical business tasks.
  2. Reduced risk: Outsourcing can reduce risks associated with business transactions and expansions. During M&A, it can be challenging to ensure that all the requirements are met, and each step is executed correctly, and even a single missed step can put the legality of the entire company at risk. Risk is also involved when a non-compliant entity is part of a transaction. 
  3. Cost-efficiencies: In situations where an organization is under a strict deadline or lacks the necessary expertise to complete a task, outsourcing to a service provider may prove to be helpful. If the cost of doing business externally is lower than an internal option, then a legal service provider may be the right choice.

What to outsource?

Certain services, such as recurring and commodity-type tasks, are well-suited to outsourcing. These include completing and filing forms with state and local agencies, document retrievals from these agencies, filing and maintaining business licenses, and entity compliance-related tasks. For these tasks, a service provider can be a more cost-effective solution than in-house options.

A top-notch service provider can also assist in different areas of due diligence, including legal and financial aspects like:

  • UCC search and filings
  • Tax and judgment liens
  • Hidden legal liabilities
  • Intellectual property matters, such as confirming IP ownership and assessing the quality of IP assets
  • Reputation and regulation checks like background checks, negative news searches, and FCPA assessments
  • Industry-specific services such as motor vehicle services, hospital lien searches, and agricultural lien searches
  • Corporate services like formations, qualifications, business licenses, dissolutions, withdrawals, and M&A filings 

What to look for in a service provider

Before selecting a managed service provider, here are a few key questions to ask:

  • Which services does the provider offer? 
  • What technology does the provider use? 
  • Does the provider have the necessary legal expertise? 
  • Does the provider have a good reputation? 
  • Have your peers recommended their services? 
  • Is the provider able to work with minimal supervision?
  • Are their services flexible (based on demand or usage) and customizable based on project need?

Companies can reduce expenditure by selecting a provider who offers a broad range of services, eliminating the need to engage multiple providers.

Learn more

Ensuring comprehensive compliance during corporate transactions is vital for mitigating risks and facilitating smooth deal closures. By outsourcing key aspects of the M&A process, businesses can navigate the complexities of due diligence more efficiently, address regulatory requirements effectively, and ultimately secure their strategic objectives. Prioritizing compliance not only protects both parties from potential liabilities but also enhances the overall success and timeliness of the transaction.

Partnering with a trusted advisor can give you the confidence that you're taking every possible step to ensure your company's success. To discover how CT Corporation can assist with your compliance requirements, reach out to your CT Corporation Service Representative or contact us here.

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The CT Corporation staff is comprised of experts offering global, regional, and local expertise on registered agent, incorporation, and legal entity compliance.

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