The value of legal entity management

Much has been published on the topic of legal entity management—managing the books and records of a parent company’s various legal entities in different geographic locations—by law firms and technology providers, but almost all of it has been about entity management services and subsidiary management. There has been little research on the strategic elements of entity management or, more importantly, what is the value of effective legal entity management. This multi-part study by Deloitte Legal Business Services* aims to change that by researching the reasons why entity management is important. Not what must be done, but the reasons why it must be done.

Part one is a study of the impact of effective entity management on M&A. The sources for our research are prominent outside counsel, sitting in-house M&A attorneys, and subject-matter specialists from Deloitte. We interviewed 12 M&A attorneys from law firms, including Hunton Andrews Kurth, Mayer Brown and Thompson Hine, as well as in-house counsel from Carrier and Dell. Combined, they have advised buyers and sellers on more than $250 billion of transactions through their careers. This report covers what we distilled from their comments on the value of sound entity management in the context of M&A.

It’s obvious when stated directly: Organizations that manage their entities well generally reap the rewards of that labor when they engage in corporate transactions. Buyers feel more comfortable making an investment, as good subsidiary governance tends to suggest strong overall enterprise governance. Buoyed by that confidence, buyers are often willing to expedite both due diligence and the overall deal timeline—and to offer a higher price for a deal.

Conversely, when buyers have unanswered questions about their target’s subsidiary management, they’re likely to delay the deal to probe further. Along the way, they’re likely to hedge their bets, double down on other concerns, and lower their offer. Every moment that sellers spend scrambling to find records and fill documentation gaps costs them money—and potentially cuts into their profit. Often, sellers must engage a law firm to help them manage these gaps and cover their buyer’s concerns, causing margins to plummet even lower.

What’s the true impact of legal entity management, both good and bad, on M&A deals? We embarked on this study to better understand what buyers and sellers experience. Our findings validated our hypothesis that the quality of subsidiary management plays a critical role in determining deal value and timelines and illuminated six key lessons about the impacts of disorganized books and records.