Mergers and acquisitions (M&A) are increasingly common in today’s business landscape. According to the Institute for Mergers, Acquisitions, and Alliances (IMAA), M&A activity continues to rise, with over $3.8 trillion USD in deals completed in 2018 – and with nearly $1.8 trillion USD completed in 2019 so far, it doesn’t look like it’s going to stop any time soon.
For many businesses, especially those in advanced technology, mergers and acquisitions are an end goal and key exit strategy. The most common scenario for M&A activity is when entrepreneurs develop a product or service that fills a gap and a larger player sees an opportunity to add it to their portfolio. For many of these deals, it’s a natural relationship that develops over time.
Getting to a closed deal, however, can be a daunting task.
Just like when a company is completing a venture capital (VC) raise or seeking financing to support operations and growth, preparing for a successful merger or acquisition requires a company to present itself in the best possible way. In this post, I’ll review some of the key tasks a business must complete to get prepped for a merger or acquisition.
M&A Process: Start with a Comprehensive Organization Review
There are many ways the merger and acquisition process can start. Usually, a third party communicates interest in the business, or a business presents itself to the market as ready for purchase. Leadership should be made aware that a merger or acquisition is under consideration, but in the early days this should be kept quiet as it may lead to disruption within the company. Disruptions to the merger and acquisition process make it more complicated or may lead to a deal never materializing.
We always recommend businesses complete a comprehensive review of the organization. Review your business plan and strategic plan, and start updating it to better reflect today’s situation. At this point in the process, your goal is to have a good handle on how well the business functions, what areas you can quickly address and improve, and where there will be ongoing operations challenges.
All this information is critical to assessing the value of your company and will have an impact on the end deal.
In many cases, M&A activity is spurred by a product or service. The purchaser is looking to add that product to their portfolio, acquire valuable IP, or gain access to buying customers. While this may be the case, you still need to make sure you present your organization as highly functional and strong.
Stepping back from daily operations to develop high-level strategic plans, an overall business plan, detailed process maps, and organizational structure charts can help you understand where you need to focus your attention.
Giving your potential buyers full and easy access to all the information they need to make the deal is critical to making the process as smooth as possible.
You should also have well developed and polished documents for use during the deal process. Detailed business plans, executive summaries, and one-page summaries on key aspects of the company help potential purchasers gain a faster understanding of the company and opportunity. Consider developing an M&A package that includes key points of interest (e.g. financial position and outlook, technology/IP portfolio, contracts and obligations, key personnel, etc.) alongside a comprehensive business plan.
Know Your Business’ Financial and Operational Numbers
Everyone involved in the M&A deal needs to know the business’ key metrics. You’ll need to express critical figures about the business with confidence and ease. This helps in establishing a value for the business while also keeping the process moving.
Prepare your team with a one-page numbers sheet that gives everyone an easily digestible quick reference. Keep in mind that you should include traditional finance metrics (sales, margins, growth trajectories) and other metrics that the leadership team in your business should know like employee count, IP holdings, and customer transaction details.
Review Other Merger and Acquisition Deals in Your Space
When working with a realtor to sell your house, the first thing they do is bring up comparable homes on the market to help establish an asking price. When selling your business, you need to do the same thing. Instead of just looking in your local area, look for similar deals in the space as well as deals that have similar features to yours but are in a different industry.
This data helps identify what type of offer you should expect and how the offer is structured.
Having this information enables you to better negotiate and manoeuvre through the M&A process. While a mergers and acquisitions consultant can guide you through the process, we always encourage business owners to do their own research as well. This validates the consultant’s work and gives you more background on what to expect from the process.
Get Your M&A Documentation Together Early
Mergers and acquisitions are documentation heavy. Prepare as much in advance as possible. This helps expedite the process and alleviates challenges over developing and delivering on the Disclosure Schedule.
You’ll want to have both a buyer package and the beginnings of a disclosure package put together early in the process.
Buyer packages are typically used to market the business and solicit interest. Once you have serious potential buyers, then you can do the hard work of putting together a disclosure package. While there may be some unique elements in every disclosure schedule, there’s a lot of similar documentation present in virtually every disclosure schedule. Start preparing those documents early so you can deliver all due diligence documents in a timely fashion.
Take Time to Support a Positive M&A Experience
Mergers and acquisitions take time. In many cases, it can take nearly a year from the start of the process through to closing a final deal. While there are many parallels to buying a house, buying a business is a very complicated process requiring both the purchaser and seller to be fully comfortable at every step of the way. As you go through the M&A process, make sure you budget enough time for each step and allocate resources accordingly.
Use the Expertise of Merger and Acquisition Specialists
Most business owners don’t go through more than one or two exits. For this reason, you should work with M&A specialists to help the process go faster and optimize your deal. Working with professional business consultants is a top strategy that you should consider to reduce blind spots and enhance the entire M&A process.