The mergers & acquisitions (M&A) process has many steps and can often take anywhere from 6 months to several years to complete.  Undertaking a merger or acquisition is not a decision to make lightly. It’s an extensive process that requires work to identify the right target company for your needs, patience to negotiate a fair deal and extensive funding to make it a reality. In this blog, we outline the acquisition process and the key steps involved.

1. Strategy development

An M&A strategy will help set clear expectations for all involved. While each deal is unique, any strategy should address what your company hopes to achieve with the deal and how it will get there. Consider the following:

• What’s the purpose of the transaction?
• How will the company secure financing for the transaction?
• What does the end operating model look like?
• Which entities are involved? (Knowing who and what is involved and how the pieces are related will help guide the due diligence process).

2. Target identification

During this phase, corporate finance teams must search and evaluate potential target companies. Knowing who and what is involved and how the pieces are related will help guide the due diligence process. This can be broken down into the following:

1. a) Determine the constituents. If you are looking at a straight merger, you will want to identify the target for strategic and synergistic benefits.
2. b) Identify any subsidiary or related entities. You’ll need to know what they are, what industries they work in, and where they’re located. Also important is whether they are qualified to do business in other regions and countries.

3. Valuation analysis

To properly value and determine the suitability of the target company in line with the M&A strategic plan, the corporate finance team need access to as much information as possible regarding the target’s operations, customers, financials, products, and more. All covered under a non-disclosure agreement.

Once the entities are known, the next step is to find out if they are in good standing and in compliance with all jurisdiction requirements. If not, it could be a deal breaker. Assess whether the issue(s) can be resolved and the time frame for moving forward.

4. Negotiations

Once valuation models of the target company have been produced, your company can present an offer and move onto the negotiation phase where terms are discussed in more detail.

5. Conduct due diligence

This is usually the most time-consuming and critical part of any M&A transaction. M&A due diligence requires a detailed examination and analysis of the target company from both internal and external sources. This helps verify the target’s value and identifies liabilities.

Due diligence tasks in M&A will include:

Financial Due diligence

• Historical financial performance (usually the last 3 years)
• Revenueanalysis: Customers, products, distribution channels, geography, pricing strategy, key contracts, etc.
• Expenses: Analysis of cost of sales, existing debts R&D, overheads, key suppliers
• Analysis of company’s assetsand liabilities including leases, plants and property assets
• Analysis of company cash flows
• Seller assumptions and projections (monthly or quarterly over next 3 years)
• Review and sensitivity of key assumptions on profit and loss, balance sheetand cash flow statements

Business due diligence

• Analysis of seller’s industry, competitive position, strategic plan
• Analysis of key customers and affiliates
• Review of company products, product sourcing strategy and suppliers
• Review of company’s research and development and marketing and sales programs
• Compensation of management and key employees
• Ownership: Analysis of key shareholders

Legal, accounting and tax due diligence

• Legal: Review of IP, patents, outstanding or potential litigation, incorporation documents, employment contracts, key customer and supplier contracts and loan agreements
• Accounting: Understanding seller’s accounting policies, controls and cash management
• Tax: Review of tax attributes that may be inherited or lost in an acquisition

Integration and Operational due diligence

• Analysis of synergies and integration planning
• Cultural fit, retention and compensation of management and employees and location of offices
• Impact of acquisition on customers, partnerships and suppliers (i.e. channel conflicts, change of control issues)
• Treatment of management and employee options and bonus structures
• Visits to seller’s offices and facilities
• Meetings and discussions with seller’s management, shareholders and other key stakeholders

6. Deal closure

With due diligence complete, parties make the final decisions on moving forward to execute the transaction. For legal teams, this comes with several responsibilities in terms of drafting the sale and purchase agreement include the seller warranties and covenants and dealing with any financing and leasing documentation.

7. Financing and restructuring

Although financing options were explored during the M&A planning process, they will be agreed in advance of the transaction. However invariably there are tweaks that will need to be agreed with the final details typically come together a few days before execution of the sales and purchase agreement and finally reaching the finishing line!

8. Integration and back-office planning

Managing the integration of an acquired company is a full-time job and should be treated as such. Both parties should put together project teams to work together to ensure a seamless integration. For the project team this means planning and strong communication .

If your team doesn’t have the expertise or the bandwidth for post-merger tasks, leverage the expertise of external advisors to help get the job done.

9. Business as usual

Once the merger is complete, it’s important to continuously monitor the success of the newly combined entity with ongoing financial, operational and cultural health checks to ensure there are no issues.

Summary

The process of completing an acquisition or merger can be cumbersome. With so many steps to take before, during, and after the merger and tricky timing issues along the way, it’s important to have the right support. Talk to us today, we’ve been helping businesses for many years and can offer advice and help with the process of M&A.