Mergers and acquisitions (M&As) are a valuable tool to facilitate the expansion of your business as part of an effective and thought-out external growth strategy.
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.
If you’re considering a merger or acquisition for your company, we’ve listed the steps that make up the process.
Set out your strategy
The first part of any merger or acquisition is creating a strategy that accounts for how you will proceed and what you want to achieve.
There are many questions to ask at this stage, including:
- Do you favour a merger (where you combine with another company and leadership team) or an acquisition (where you take control of another business)?
- What do you want to achieve through the M&A?
- What will you look for in a target company?
- How might a M&A fit into the future of your business?
By setting out your strategy first, you will better understand how a merger or acquisition fits your goals. It refines your search and enable you only to pursue businesses that suit your requirements and lead to long-term success.
Start your search
Using your strategy and preferences, you should be able to refine your search criteria for a target company, focusing only on companies that align with your goals. The search now begins.
To uncover companies that could be part of a merger or available to acquire, it’s beneficial to have a strong network. A network enables you to identify connections with businesses for sale or off-market opportunities where owners may be attracted by your approach. It’s particularly crucial if you’re looking to convince a company owner who isn’t publicly looking to sell.
Many people also utilise search agencies to do the leg work for them.
Remember that the search process may be slow while you await the perfect fit. Be patient and carry on until you find what you need.
Begin the conversation
Once you have found a target business to pursue, it’s time to put the feelers out regarding what they are looking for in a deal and whether they may be willing to work with you. This kickstarts the negotiation process.
You will also want to find out more about the company to ensure it’s suitable for your growth strategy – and this is an informal way to start doing so.
Conduct your assessments
Before progressing with the deal, you need to assess any business to ensure it’s worth considering and determine what you should offer. You will uncover information about it through research.
Part of your research will include analysing the performance of the business – ideally, you want one that is successful or has the potential to be. You may also want to conduct an independent valuation of the company.
Other considerations include:
- The assets of the target company
- Staff and skills
- Leadership teams
- Customer book
- Brand reputation and market presence
- How it aligns with your business – including company culture and values
- Financial data – including filed accounts, aged debtors and creditors and fixed asset registers
After this point, you should be confident that the business suits your requirements and will drive results.
Negotiations
You will have a better grasp of what you think the target company is worth by this stage. It’s time to make an offer.
The negotiation process can be extensive, as both parties seek to secure a fair price. You will also need to work on the terms of an agreement. This may be more problematic in a merger, as it will begin a long-term working partnership between owners.
Lawyers will need to be appointed to enable you to complete Heads of Terms, which covers the outline terms of your agreement.
Due diligence checks
Once you have negotiated a deal that works for all parties, there will be a period of due diligence. It follows from your assessments and should ascertain whether your original assumptions about the target business are accurate.
The due diligence checks should be carried out by your lawyer from a legal perspective as well as financial and commercial due diligence using accountants or 3rd party specialists.
It will include a broad scope of information related to the business, including the assets and liabilities, customer contracts, staff contracts, certificates, intellectual property and so on. The aim is to uncover any hidden issues that may threaten the deal’s validity, such as debt, ongoing legal disputes or other problems.
Raise funding
Your Heads of Terms will determine the price for the merger or acquisition. You now need to raise the finance to cover it.
Very few businesses will have the reserves to cover an M&A, so external finance is a must. Fortunately, there are many solutions on the market that can assist.
Examples include:
- Commercial loans – secured and unsecured
- Private equity investment
- Confidential invoice discounting
- Asset finance
- stock finance
Our guide goes into more detail about the variety of options to raise acquisition finance and how each works.
The final contract
With a negotiated agreement and thorough checks to uncover any potential issues, it will be time to formalise the deal with a final contract. This is either a share purchase agreement, where you purchase the whole company, or an asset purchase agreement where you only purchase the customers and assets of the business for example.
The contract will contain details of the type of purchase agreement (including what is being transferred under the deal), the agreed price and any other terms that apply. Most of this will have been discussed in the negotiation stage, so there shouldn’t be any surprises.
It’s then down to all parties to finally agree and sign the contract with all the usual warranties and indemnities included.
Close the deal
Once everything has fallen into place and funding has been put in place, finalising the merger or acquisition will now occur.
Funds will transfer to the lawyer, and the company will officially be under new ownership (in the case of an acquisition) or merged with another. The process is complete – but it doesn’t mean the work is over.
The future
Once the M&A takes effect, there usually comes an adjustment period in which the two companies (if a merger) align, or you get an acquired company into shape.
During this process, you may need to implement operational changes, train or redeploy staff, update policies and bring functions together. You need to get everyone on the same page under the new leadership to create one well-oiled machine.
You may also require funding to manage cash flow, especially if the adjustment period requires expenditure or a temporary dip in revenue.
Conclusion
If you find the perfect target company and negotiate a great deal, an M&A allows you to scale up your business and boost performance.
However, it’s a long process, and you need to be sure before you commit – primarily due to the financial commitments associated with lawyers, finance and due diligence costs. By undertaking the steps listed, you will ensure you find the perfect match for your requirements and allow the deal to complete to everyone’s satisfaction.
Then, you can focus on the promising future of your expanded company.
If you need support in arranging and funding a merger or acquisition for your business, get in touch today to find out how we can help you with our tailored services.