Meet the M&A experts: Step-by-step guide to navigating the processes
It is very important that companies take appropriate legal, financial and tax advice in any M&A deal negotiations.
As business owners reflect upon their options within M&A, here are the views of a selection of experts who can offer invaluable experience in considering the steps to take — from merging with new partners to full sales and acquisitions, through to successfully optimising the outcomes with a change of ownership.
A key step for any company taking on investment or merging with new partners is first to critically analyse why they are taking on the investment or new partners. This analysis is critical in setting out the basis for the process and will help companies to identify who is the appropriate partner for their plans and what is the most appropriate structure for achieving the aim (i.e. the “who” and the “how” of the investment).
The “who” is getting to know your future partner — this is done through due diligence. The scope and breadth of this due diligence will vary on a case by case basis and your advisors will be able to guide you on the recommended approach.
Leaving aside any technical due diligence (legal, financial, etc) it is very important that companies assess whether investors will be a good partner to the business from a commercial perspective and will align with the Company’s goals in taking on the investment. Companies can assess partners by looking at the investors track record and discuss with trusted advisors any market intelligence.
Personal relationships are also very important and companies should meet with the investment team and have clarity around who will be working with the company on a regular basis (e.g. the investment advisors and/or board nominees). It is also important to understand what are your prospective investment partners goals for their investment — why do they want to invest in your company, what is their goal and what is their timeline for achieving it.
Companies will need to assess whether respective goals align. All of this then feeds into how the investment will be structured and how the group will be governed and operated following the investment.
It is very important that companies take appropriate legal, financial and tax advice on what is the most appropriate structure for their stated objectives and ensure that any investment documents are clear and balanced so that parties know their rights and responsibilities. If the investment works out well for all parties then it may be that parties do not have to refer to the investment agreements again but it is critical that these documents provide a clear foundation so that if a dispute arises there are adequate structures in place.
We advise clients who are considering a sale to conduct a thorough review of their business. This ensures that the key diligence items, which potential buyers will want to review, are in shape before initiating the sales process. A proactive approach reduces the likelihood of unexpected issues and delays during diligence. Important areas for review include not only internal items such as the statutory books and employment contracts but also key value drivers such as IP, commercial partnerships, and customer relationships.
It is crucial for sellers to fully understand and agree to the proposed terms of sale, including any deferred or contingent payments, before proceeding to detailed diligence and legal negotiations. If the sale involves contingent consideration, a buyer should clearly understand what metrics need to be achieved to secure this additional consideration. As the buyer will control the business post-sale, the seller should understand how the buyer intends to operate the business. Seller protections should be documented in the legal agreement to ensure that the business is managed in this way in order to maximise the opportunity of achieving the contingent consideration.
If a seller retains a minority stake in the company post-sale, it is essential that they consider the future management of the company. Without specific contractual safeguards, the buyer may have considerable autonomy in how the business is run. Sellers should consider how they will secure future value from their minority shareholding, including the possibility of negotiating an option to require the buyer to subsequently acquire these shares, or providing for a future onward sale of the target company.
It’s essential that detailed conversations take place between prospective partners in a merger, or buyer and seller well before a deal is concluded to agree on an integration and growth strategy. Protections for both sides around the strategy should then be built into the transaction legal documents because growth is not assured just because the deal has concluded.
It is becoming common practice for a buyer or investor to include a contingent element for post deal integration in their offer. This is an effective method to keep the seller incentivised to realise the synergies between the two entities and deliver value for all. Ensuring that management has identified areas of product, customer or supplier overlap early in the process will unlock cost and revenue synergies post-deal and ensure that deal value isn’t eroded.
In many instances, it is the people and their expertise that are key to the enterprise value of organisation and keeping them engaged and incentivised in particular during the integration period is ideal to maximising value for all.
Post-deal integration can prove a challenge, even for the most experienced consolidators in the market. Therefore, EY’s Strategy and Transactions division has a dedicated team providing M&A integration services to assist clients with the integration journey and deliver the improved post-deal operating models to enhance value.
In a full acquisition scenario, be thorough in planning the process for integrating the target business operationally. Completing an acquisition can sometimes be drawn-out and “deal fatigue” can become a factor, but completing only marks the beginning of the actual business integration process.
Be it from a personnel culture perspective or how the buyer envisages its systems interacting with the target's, it is essential for the merging parties to plan for and align on post-completion integration. Doing so avoids gaps or a drop-off in the target’s service levels/productivity, which could impact on revenue.
The earlier the merging parties start thinking about the business integration process the better. For example, if the target entity is moving out of a seller group, buyer's diligence should identify if there are any sell-side transitional services that may be required by the target for a period of time following completion as it moves into the buyer's group.
Buyers that have completed multiple acquisitions and have real-world experience of integrating a target business are the most successful. If it is a buyer's first time making an acquisition, double-down on efforts around how the target business will operate from day one after completion.
