5 Things You Must Do In Preparation For A Mergers & Acquisitions (M&A) Transaction

It seems that 2015 has been a busy year for mergers and acquisitions. This could be related to factors such as low interest rates on borrowings, improvements in technology & globalisation, excess idle cash with low cash rate returns, improved signs of volatility and stability in the economy and the need and ability for business expansions etc.

Your property could be sold at a premium price if you’ve spent some time & monies in renovations, styling and marketing before the inspection date. This same theory should be applied when going into an M&A transaction.

There are 5 things that must be considered if you are thinking of entering into an M&A deal:

1. Have the knowledge to be able to justify the figures in the accounts – This could be related to historical data for the past 2 – 3 years and the future projections for the next 2 – 3 years. Buyers would want an investment with a successful, transparent and proven track record of the past and also a verifiable and sustainable revenue stream in order to project the future earnings. Remember buyers want to see the potential values of the business. If they can see that the business has a potential gold mine then a higher sale price would be achieved. Bearing in mind that buyers want to see the Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) after normalisation adjustments, rather than the turnover itself.

2. A good business foundation with a strong management team – Buyers want to see the strength of the existing management team rather than just focusing on the owner of the business. Buyers want to acquire a team with a good culture and a business that can grow without sole reliance on its owner. The more an owner is able to remove themselves from the operational roles, the more value they can apply against the EBITDA.

3. Invest in a good team of advisors – A good accountant and lawyer who are familiar with the implications of tax and commercial negotiations could save you a fortune in taxes and put you in a better position in terms of negotiations. First of all it is highly recommended to have your business valued in order to give you a true and realistic expectation of the company’s value and your bottom price tag. Having a good lawyer working with your accountant could help you resolve any unforeseeable issues that may come about during the transaction – i.e. Earns-out Arrangements, Contingent Liabilities to the Directors and Potential Purchase Price Adjustments etc. It is necessary to have your sale agreement reviewed, negotiated and revised as this can mitigate some of the most common post-closing disputes and lead to a more successful transaction.

4. Be honest and be prepared for a lot of questions to be asked – Experienced buyers understand each business has its positives and negatives and as such a detailed review will be conducted to reveal any cons to the surface for negotiation purposes. In my view being honest and transparent is always the best policy to go by to avoid any further disputes and embarrassments. It could also reduce the risk of a deal falling through which would be an expensive exercise emotionally and financially.

5. Focus on combined synergies – Synergies represent the extra value that can be created from the takeover. Merging with another business is just like a marriage. It is important to understand the common goals of both businesses, to see if they have the right mix of cultures and that both management teams are compatible. The primary objective of an M&A transaction is to create value for shareholders that exceeds the costs of their acquisitions. In fact, synergies are measurable – i.e. the costs of reduction in employment or overhead costs, cross selling the products and services or new market entrants etc.

Entering into an M&A deal is never a simple and quick process. The due diligence process is usually completed within 3 to 6 months at the earliest, and sometimes could take a further 3 months to 2 years to complete the “Wash Off” or “Earn-Outs” arrangements.