Elements of a Strong Merger and Acquisition Transaction

During the pandemic, due to much uncertainty about the future, business owners held on to their businesses. Would their industry fare well? Would there be a great shift in technology as a result, and would they have the bandwidth to keep up?

By early 2022, M&As found their foothold and a lot of businesses have benefited from the outcomes those transactions. Now, success depends on your reason for selling, acquiring or merging. Are you close to retiring and you want to gain the most value from your business? Are you a competitor buying into more market share? Or do you need more skilled staff to grow organically?

Here is what you should think about when considering mergers and acquisitions.

For Buyers

Do you want to acquire a profitable business or merge with another company to increase market share, gain skilled workers, diversify or support future succession? If you are in this position, weigh the pros and cons of organic growth vs. inorganic growth (M&A):

Organic Growth Mergers and Acquisitions 
Less expensive than inorganic growth Mergers don’t require cash
Less risky than inorganic growth A merger allows shareholders to won a smaller piece of a larger pie, increasing their overall net worth
Can be planned/controlled A merger reduces costs, overhead and competition
Maintains existing culture Acquisitions decrease surplus capacity and reduce competition
Can be very slow Acquisitions can give you a means to participate in a foreign market
Growth may be limited Acquisitions could lead to separate entities repeating the same work

After this consideration, you may still be set on acquiring or merging. But first, have your attorney and CPA look over your business before jumping to the agreement or financing stage. You must be properly capitalized and show healthy financial statements for a target company to seriously consider your offer.

With changing structures for future financing, it is also important to have a longstanding relationship with your lender. Make sure that they are willing to set favorable terms and work with you through the transaction.

When looking at target companies, you must perform due diligence on the seller’s or target company’s business valuation.

  • Are their financials good?
  • Do they have liabilities?
  • Do they owe on taxes?
  • How is their employee base?
  • How is their client base?

If M&A can help your business keep up with coming changes in the industry or support accelerated growth and succession planning, then merging or acquiring may be a good option.

For Sellers

So, you’re ready to sell. Are you really? Here are a few basic steps to help you gain the highest value for your company.

  1. Identify what kind of buyer you want (internal/external, private equity, competitor)
  2. Clean up your financial world by reducing debt, modernizing operations and/or increasing cash flow
  3. Get a business valuation for an accurate understanding of
    what your business is worth
  4. Work with your CPA to be in a good position to highlight your assets
  5. Make sure the anticipated buyer is a good fit financially but also culturally
  6. Consider the pros and cons of selling assets vs. stock
  7. Decide whether you’re keeping real estate in the deal for future passive income
  8. Determine what is next to ensure that proceeds from the sale will support these goals (e.g. retirement, starting another business)

During the due diligence process, the prospective buyer has access to your financial statements, key employee data and more. They want to know whether this will be a good transaction for them, so having a few years to plan for a sale can help you improve your valuation and negotiating power.

Future buyers will also be looking at a company’s environmental footprint, so keep that in mind when organizing your environmental, social and governance strategy and reporting.

The People: It’s not all about the numbers. Make sure your people will stay as part of the process. Maintain those relationships and make employees want to stay through an M&A transition. Part of the value of the company is the employee base and customer base. Buyers look at markets, financial forecasting, growth and debt but they also assess the skills of employees, the management team and vendor relationships.

This video discusses how business value is adjusted based on these factors:

Work with your attorney and your certified public accountant at Anglin to help get your financials in order before considering an M&A transaction. We are always here to help walk you through the process and clarify any areas you may have questions about.

Additional Reading: Finance Now or Wait? How to invest in your business and finance M&A transactions.