A merger or acquisition (M&A) entails a complex transaction that harbors significant risks and uncertainties. One of the most critical challenges that buyers face is to manage vendor contracts inherited from the acquired company. It is crucial to implement best practices to handle these acquired vendor contracts in order to reduce risk, ensure uninterrupted service delivery, and uphold vendor relationships.
A Deloitte study revealed that managing vendor relationships is among the top challenges acquirers face in an M&A transaction. The study discovered that 72 percent of acquirers identified vendor contract management as a significant challenge, and 55 percent reported encountering unforeseen integration challenges due to vendor-related issues.1
To help overcome the challenge of acquiring existing vendor arrangements in an M&A deal, here are some best practices that acquirers can adopt to ensure a successful transition:
- Review existing vendor contracts thoroughly. Acquirers should carefully review all vendor contracts to understand the terms and conditions, including the rights and obligations of both parties, payment terms and termination clauses. This will help acquirers assess the risks and opportunities associated with each contract and identify any issues that may require further attention.
- Communicate with vendors. After reviewing the contracts, the acquirer should communicate with the vendors to inform them of the merger or acquisition and discuss any potential changes to the existing contracts. Communication is crucial to maintain positive relationships with vendors, and it can prevent any misunderstandings or disputes in the future.
- Evaluate the vendor’s performance. Acquirers should assess the performance of each vendor and their contracts to determine if they meet the needs of the merged entity. This process can help identify contracts that may need to be replaced or renegotiated to better align with the company’s goals and objectives.
- Consolidate contracts where possible. In some situations, consolidating contracts could benefit the acquirer by simplifying the vendor management process, reducing costs and enhancing efficiency. However, it is crucial to ensure that any consolidation efforts do not result in the loss of critical services or expertise.
- Identify potential contract risks. Acquirers should identify any potential risks associated with the existing vendor contracts, such as financial or operational risks. This information can help acquirers mitigate these risks and develop contingency plans if necessary.
- Plan for contract renewal. Acquirers should also plan for contract renewals and ensure that any new contracts align with the company’s strategic objectives. This approach can help to ensure continuity of services and avoid any disruption to operations.
Successfully managing existing vendor contracts is essential for a successful merger or acquisition. According to a report by McKinsey, companies that effectively manage vendor relationships can achieve a 20-30 percent cost reduction and up to a 30 percent increase in service quality. 2 By implementing these best practices, acquirers can confidently navigate the complexities of the transactions and emerge with a stronger, more efficient organization.
Colin O’Donnell is the Director of Mergers and Acquisitions at Gertsburg Licata Acquisitions. If you need assistance in mergers or acquisitions or have any questions about the content of this article, please don’t hesitate to contact Colin at [email protected] or (216) 573-6000 x 8100, or fill out our contact form.
1 Deloitte, “The state of the deal: M&A trends 2021.” Accessed April 12, 2023. https://www2.deloitte.com/us/en/insights/economy/spotlight/state-of-the-deal-m-and-a-trends-2021.html.
2 McKinsey & Company. (2019). Procurement as a service: Reimagining the source-to-pay process. Retrieved from https://www.mckinsey.com/business-functions/operations/our-insights/procurement-as-a-service-reimagining-the-source-to-pay-process
