Back In Business: Seven Steps To An M&A Deal
In the wake of Covid-19 uncertainties, companies are back in business and looking to redefine what has come to be the “new normal”. In this emerging era of business growth and development, organizations are evaluating what opportunities could lead them to the next strategic advantage in today’s market.
For some, such growth and development may take the form of acquiring another company. If you are considering a possible acquisition, it is important to understand the overall process from the outset. Although transactions vary in complexity and differ by industry, most follow a similar procedure. Below presents a high-level overview of seven general steps to a typical M&A deal.
1. Develop a Framework
The first step to initiating an M&A transaction as a buyer is to understand your motivating factors. Is this a strategic acquisition of a competitor or a financial transaction intended to grow an ownership portfolio? Understanding the motivation behind a deal will help you evaluate what target companies will be the best fit for your business.
Although the framework of the transaction may change based on how negotiations with a target company progress, you should consider what deal structure would benefit your company the most. Whether a transaction is arranged as an asset or stock purchase has tax implications and can impact your exposure to the target company’s liabilities.
When determining the structure of the transaction, you should also consider what financing method would be most advantageous. For more information about financing options refer to "Show Me The Money!": Financing An M&A Deal
2. Evaluate Potential Targets
Once you have considered your motivation for entering into a transaction, it is time to evaluate what potential targets best fit into such framework. This includes analyzing what performance indicators you expect to be met, what geographies you would like the target to operate in, and what an overall budget looks like for the transaction (including the purchase price as well as transaction costs). Further, it is at this point that you should determine whether engaging an investment bank or broker would be effective in discovering potential acquisition opportunities.
3. Conduct a Valuation
Once a potential target is selected, you should conduct a valuation of the target in order to establish whether it is worth pursuing (and for how much). There are various methods utilized when valuing a company that a financial advisor can assist with, but two figures to keep in mind are the target’s value as a standalone company and the target’s value when taking into account its synergies with your company. Synergies of an acquisition can include both hard/operational synergies arising from direct cost savings as well as soft/financial synergies you may realize, such as if the target company operates in an adjacent industry to your company.
4. Engage in Negotiations
Once you form a sense of what the target company is worth to you, it is time to negotiate not only the purchase price of the transaction, but other vital terms such as holdback amounts, earn out periods, representations and warranties, and more. A helpful tool in the negotiating process is to outline the key terms of a transaction in a letter of intent to help both parties identify terms of alignment as well as any flush out deal-breakers. To find more information about letters of intent refer to When Is A Deal A Deal? Letter Of Intent Fundamentals
5. Conduct Due Diligence
Throughout this process you might obtain information about a target company, such as certain financials to help in the valuation or other high-level performance indicators. However, it is at this stage in the negotiations that a target begins to provide a more in-depth look into its operations. Often, a target company will require you to sign a non-disclosure agreement to restrict you from divulging any confidential business information in the event the acquisition never materializes. At this point, a buyer generally prepares a list of information to request from the target company, which the company will normally upload to an online data room for ease of access, organization and searching capabilities. Analyzing such information is key in identifying current or potential liabilities you may inherit from the transaction, and further shapes the representations and warranties you will ask the target company to make in the purchase agreement regarding the purchased assets or stock.
6. Draft a Purchase Agreement
Once the main terms of the transaction are negotiated and the bulk of due diligence is completed, it is time to formalize the arrangement in a purchase agreement. Although it is recommended to engage legal advice from the outset of a transaction, at a minimum, you should always consult legal counsel to draft or review a purchase agreement. Many of the terms of a purchase agreement are commercial in nature (and therefore a business decision for you to make), however, legal counsel can advise you regarding how certain provisions may impact legal risks, such as indemnification provisions and the survival periods for representations and warranties.
7. Initiate the Transition
Intuitively it might seem like executing a purchase agreement would be the end of the M&A process, but in some respects it is just the beginning. Once you acquire a target company, the transition to integrate the two organizations begins. In some cases, a transition period is formally recognized in a transition services agreement whereby the seller offers to provide its services to the buyer while the buyer transitions to being the new owner. In any case, this is the stage where you incorporate the target into your business and implement your plan for growth and development.
Although these seven steps provide a simple overview of the M&A process, in reality, it is anything but simple. When considering an acquisition, it is best to engage financial and legal advisors early to help guide your business through the intricacies specific to you, your deal size, and your industry. When you’re ready for your next deal, reach out to a member of our M&A Group for tailored guidance through the M&A process.
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