The world of mergers and acquisitions is complex and can seem intimidating if you are new to these kinds of transactions. While the truth is that each individual transaction will be different in some ways from the next, the general process is typically similar for each merger and acquisition, following a series of steps from initial contact to deal completion.
In this concise guide, we will set out the typical M&A process, which includes:
- Searching for prospective acquisitions
- Valuation
- Negotiation
- Due diligence
- Closing the deal
Of course, the steps will differ depending on whether you are on the buy-side or the sell-side of the process, but in general these stages will be similar.
Finally, we will tackle the subject of intermediaries and why you might want to use a business broker to help smooth the process.
Hopefully, by the end of the article, the M&A process will have been demystified, and you will be able to approach a future transaction with confidence.
Step One - Preparing your M&A strategy
The first stage of the M&A process involves setting the goals for your M&A strategy and beginning the search for the most suitable prospects.
Of course, before you start looking, it’s important to set some parameters to help you narrow down your search. For example, you may want to purchase a company within a specific industry, and of a particular size, turnover, geographical reach, and set of service lines.
You will also need to set a preliminary acquisition budget according to the available capital you have to spend on your new merger or acquisition prospect.
Once you have decided on these vital criteria, you can narrow down your search and begin researching suitable candidates that operate within your parameters. It’s a good idea to compile a lengthy list to begin with and then narrow them down with the help of rigorous research, not only into the company itself but into its industry, particularly if you don’t have much experience of that market.
Through this process, you will slowly but surely weed out unsuitable targets and end up with a shortlist of the most appealing prospects that could be a good fit for your organisation. You can then make initial contact with these targets to find out if they would be amenable to a merger or acquisition. You can do this by sending a Letter of Intent.
Step Two - Value a business
Once you have narrowed down your targets and found a prospect amenable to a merger or acquisition, it’s important to have a valuation conducted of their business. Alternatively, you should ask to see their valuation if they’ve already had one carried out recently.
A valuation is very important as it gives both seller and buyer a good idea of a company’s true market worth, which will help both parties to settle on a fair price.
If you are not sure how to value a business, there are several different methods to consider, each with its own unique pros and cons.
Step Three - Negotiations
Once the valuation has been completed to your satisfaction, it’s time to begin the initial negotiation process.
This is where you and the seller begin to work out prospective terms for the merger or acquisition, in preparation for creating a contract further down the line.
During this negotiation phase, you will need to establish and settle several critical aspects, ranging from indemnities and contingencies to warranties, projected timeline for the process, and how the post-merger integration will be handled from both sides.
This stage of the M&A process may not seem like the most complex, but this is the part of the journey where many deals fall through, usually because either party is not amenable to compromising in some vital aspect.
Step Four - Due Diligence
Due diligence is the stage of the M&A process that requires the most time and dedication spent on it, as this is the part of the process where you will gain access to the company’s detailed documentation.
Consequently, you will be apprised of every aspect of the business and the way it is run, from its supply chain and customer base to detailed financial records, legal issues, assets, infrastructure, existing contracts, existing liabilities, and so much more.
Using this vital information, you will be able to weigh up the potential risks and benefits of acquiring the business and work out whether it will be a sound financial, legal, and corporate fit for your own company.
The importance of due diligence can’t be stressed enough, as this is the part of the M&A process where previously undiscovered obstacles may come to light, such as debts or legal battles, which could prove a hindrance to potential buyers.
Step Five - Closing the deal
When due diligence has been satisfactorily completed, it’s time to move on to finalising the deal and sorting out the finances to make the merger or acquisition happen.
Both parties will be involved in drafting a final contract and finalising all the arrangements to everyone’s satisfaction.
Before the contract is signed, your legal teams will carry out a final review to ensure that all legal and financial terms and conditions have been met. Finally, you will be able to sign on the dotted line and make your payment.
Integrating the new business
Once the deal has been closed and your merger or acquisition has been finalised, the M&A process doesn’t technically end, as you still need to go through the all-important integration process.
This is a highly sensitive part of the M&A journey, requiring everyone involved to collaborate and communicate as effectively and diplomatically as possible to ensure the business continues to flourish.
During the negotiations phase, you and the seller will probably already have come up with a strategy to make integration as straightforward as possible. Now it’s time to implement that strategy – adjusting along the way – to help you align your organisation with your new business.
This doesn’t just mean combining your assets and fine-tuning operations but also involves finding ways to seamlessly merge your teams and align your company goals and cultures.
It goes without saying that this process can be fraught with difficulty, which is why it’s important to continually monitor and adjust the integration as you go along, to ensure the well-being of the new venture – and everyone involved in it, from employees to suppliers and clientele.
Why use a business broker?
There’s no denying that the M&A process can be daunting, lengthy, and complicated. To help simplify the journey as much as possible, you may wish to hire the services of an experienced and trustworthy business broker, who can take you through the entire process from start to finish and provide plenty of expertise, advice and assistance along the way.
Here at Harris Acquire, we pride ourselves on helping buyers and sellers find the right deal so they can transition to an exciting new chapter.
If you are keen to embark on a merger or acquisition, don’t hesitate to give us a call on 01926 757100 or send an email to Hello@harrisacquire.com and one of our friendly, experienced team will be in touch.