A successful M&A strategy can be a game-changer for buying or selling your business. However, it is a complex process that requires careful planning and execution. This article discusses factors to consider for a successful M&A venture.
Successful mergers and acquisitions between private businesses typically entail various critical business, legal, human resources, financial, and intellectual property challenges. To navigate the process successfully, you must understand the issues and dynamics involved in M&A.
A Clear Strategic Rationale
Before embarking on an M&A deal, it is crucial to have a clear and compelling strategic rationale. This involves aligning your M&A goals with your long-term business objectives. Ask yourself:
- Why are you buying/selling the company?
- How will it enhance the buyer or seller’s business?
- What synergies can be achieved?
A well-defined strategy will guide your decision-making process and help you avoid costly mistakes.
Rigorous Due Diligence
Due diligence is a critical step in any M&A transaction. It thoroughly examines the target company’s financial, legal, and operational aspects. Conducting and preparing for a comprehensive due diligence process will uncover potential risks and opportunities. Key areas of focus include:
Financial Due Diligence: Analyzing financial statements, tax returns, and other financial records.
Legal Due Diligence: Reviewing contracts, intellectual property rights, and litigation history.
Operational Due Diligence: Assessing the company’s operations, management team, and customer base.
Cultural Due Diligence: Evaluating the cultural compatibility between the two companies.
The seller needs to be prepared to answer questions and provide documentation. By anticipating the due diligence process, you can streamline the process and minimize disruptions. A Quality of Earnings report is a great way to ensure you are prepared.
Successful Integration
A successful M&A deal is not just about the acquisition itself; it is about the integration process. A well-planned integration strategy is essential to minimize disruption and maximize value. Key considerations include:
Communication Plan: Develop an effective communication plan to inform employees, customers, and other stakeholders.
Change Management: Implement a change management process to help employees adapt to the new organizational structure.
Leadership Team: Build a strong leadership team to guide the integration process effectively.
Post-Merger Integration: Continuous monitoring and adjusting the integration plan to address challenges and seize opportunities.
M&A Evaluations Are Negotiable, but Fairness is Key
While negotiations are a natural part of the M&A process, ensuring fairness for all parties is essential. Develop a robust negotiation strategy that balances buyer and seller interests.
Negotiations depend on multiple factors, including comparative market analysis, the position of the buyer, the seller’s historical financial performance trends, and projected company growth. A buyer will also investigate proprietary technologies, the industry, the company’s risks and earnings quality, the experience of key employees, and other determining factors before negotiating a price.
All successful merger and acquisition negotiations require some compromises on both ends. To maintain a firm footing, you must evaluate the negotiating environment. Ask yourself the following questions:
- Which party has the upper hand?
- Who needs the deal more?
- Are there multiple bidders in the mix?
- Can non-financial terms be negotiated for a better price?
- Is the deal price fair/attractive enough to convince you to face post-closing indemnity challenges?
- Do you have the right help, and are you fighting for the right deal?
If you cannot agree on an acquisition price, consider an “earnout” agreement. This agreement enables the seller to receive further consideration if the business achieves specific financial metrics. While an earnout poses many risks for a seller, it can help achieve the desired return.
Negotiating with multiple bidders is an option that can also help increase the price and secure better terms. However, knowing when to walk away from a deal that does not meet your expectations is essential.
Employing skillful negotiation strategies at this stage of the process is critical. Having experienced advisors on your side to help make reasonable counteroffers is essential for a successful outcome, especially if the other party has hired advisors. The aim is to establish a rapport with the lead negotiator on the other end so that both sides come away from the deal satisfied.
Prepare for a Time-Consuming and Exhaustive Process
Most successful mergers and acquisitions take a long time; typically, it can take four to six months to finalize a deal. The timeframe of your M&A deal will depend on the buyer, their due diligence, urgency, and the strength of your M&A strategy.
A deal can be shortened with the assistance of a financial advisor and a lead negotiator, who will make all corporate and financial data available in a secure online portal and maintain a draft disclosure schedule. An advisor will also ensure that management presentations are prepared in advance, targeting key points that favorably present your company and advise you on strategically answering financial and operational questions.
Secure Alignment from Key Stakeholders
Before initiating an M&A deal, it is a good idea to secure alignment from key stakeholders, including your board of directors, executive team, and major shareholders.
The Value of a Strong Reputation
Your reputation is one of your most valuable assets. A strong reputation can attract high-quality buyers and sellers and help you negotiate better deals. It should never be overlooked.
Hire an Experienced M&A Team
M&A negotiations involve multifaceted deal structures and contentious legal challenges. Hiring an experienced M&A team will help you reap distinctive M&A benefits. Experienced outside advisors who specialize in M&A and are experts in specialty areas, such as intellectual property, tax, and employee matters, will help you navigate the M&A landscape so you can spend time on your business rather than the process.
An experienced advisor will assist you in designing and executing the selling process, identifying, contacting, and arranging meetings with prospective buyers. They will also assist in responding to potential buyers’ due diligence requests and provide critical advice on comparable market valuations during the negotiation process, helping you make the right decision.
Windes knows the financial realities and tax implications of a successful M&A strategy. Our financial due diligence and tax services provide a complete understanding of a target’s financial statements, projections, capital expenditures, inventory, debtors and creditors, major customers, cost and margin analysis, and a thorough review of tax reporting and risks of additional under-reported tax.
Quality of Earnings reports are often used in financial due diligence, both on the buy- and sell-side of an M&A transaction. Windes will collaborate with the target’s key management and due diligence team to identify favorable adjustments to EBITDA calculations and net working capital to optimize deal outcomes. Whether you are buying or selling a business, Windes can help prepare your team to ensure you are prepared and your accounting records are complete and accurate. We can also work with you to evaluate investment and financing opportunities utilizing cash flow and financial models. As experienced specialists, our team will help you save money in the long run by identifying risk factors in your transaction.
Our tax team can assist with earnout calculations, tax filings, deadlines, and post-close payments. We work with the buyers and sellers throughout the due diligence process to avoid conflicts and can assist with any post-close disputes that may arise.
Discuss Relevant Employee and Benefits Issues
M&A transactions involve multiple essential employee and benefits issues that need to be addressed, such as the restricted equity and outstanding stock options issued by the seller. Discussions need to be had with the buyer to determine if your employees will need to “re-vest” their vested options or invest part of their equity into the company. Ensure that certain employees sign confidentiality and invention agreements, as applicable.
The equity grant agreement should be carefully reviewed. Does the buyer plan to establish a “carve-out plan” or offer retention agreements to key employees? Windes can assist in negotiating the new employment agreement terms and discuss employee termination and the related severance costs, especially if the accelerated payouts to key employees trigger the excise tax provisions of the golden parachute tax.
More Considerations
The following are other considerations to remember in formulating your M&A strategy:
- Prepare your intellectual property list and related documents to help the buyer assess your company’s value correctly.
- Negotiate critical aspects of the letter of intent to ensure you maintain your bargaining power from the start.
- Prepare a well-drafted acquisition agreement that protects you from financial, legal, and other liabilities.
Successful merger and acquisition transactions can be a long, winding process that needs to be handled carefully and strategically. Windes can help you secure a mutually beneficial M&A deal with your buyer. Our specialists have the expertise and experience to collaborate with other advisors, such as investment bankers and M&A attorneys, to create and execute a successful M&A strategy. We tailor our due diligence services based on your specific situation. We can provide the accounting, assurance, advisory, and tax services you need to negotiate, structure, and complete the transaction with the most favorable outcome. We are here for you every step of the way – from preparing your business for sale or due diligence on a target through post-close.
Connect with us today for more information.