Mergers and acquisitions (M&A) are an integral part of corporate life. They are often used to expand businesses, increase profits, and create new markets. However, M&A deals can also be a source of stress and anxiety for those involved and can have large financial risks if not assessed correctly.
If you are involved in an M&A deal, there are certain steps you should follow to ensure that you are prepared for the process.
In this article, I will discuss the key steps you should consider before entering into an M&A deal.
Find the company that you want to merge with
It is important to think of mergers & acquisitions as the foundation for a better future for your business, and one of the most critical steps is to learn as much as possible about your potential partner. Although there are many ways that you can increase the likelihood of a positive outcome during a merger or acquisition, such as conducting due diligence, nothing can replace learning about a company by sitting down and talking with the employees.
Make sure you find out all you can about the company before meeting with them. You need to know everything they have done in the past, what their current position is, and what they have planned for the future. Never go into a meeting without having a base understanding of their strengths and weaknesses – research will give you a solid foundation for your initial conversations.
Build a strong relationship with the owners
With mergers and acquisitions (M&As), it is essential to focus on the relationships of the stakeholders. A good M&A process is one that puts these relationships first. Both parties involved in an M&A should be prepared to foster relationships, build trust even before the takeover happens.
Understanding the culture and business set-up is also important as let’s say the owners still have a lot of involvement in the company, if they then sell, will this potentially put the future at risk, as their customers are buying into them rather than brand. If a company already has a relevant good management structure and is run by the employees, then that is a good sign the company has a viable reputation outside of the owners, therefore taking time to discuss ‘who’ the employees are and what they deliver is essential to understand how the company will be run after the M&A is completed.
Determine if the company is stable
So how do you know if the company is stable? Well, the first thing you have to do is check out their financial health.
For any business to survive, it needs to constantly innovate and improve. You can determine whether a company is constantly improving or stagnating by examining its annual report and asking more information on any warning signs.
Determining whether the company qualifies as “stable” can be quite challenging, but there are some landmarks you can look for. This would start by requesting at least 2-3 year detailed history of the financials (this would preferably by month and at cost centre level) then you can see any large movements in key sales or costs which could indicate one-off or risk areas, that might impact the future of the business.
You also need to review the current balance sheet position, especially large liabilities or debt, as funding companies will be looking at the risk of any lender, so if a company is already highly geared (i.e. have lots of external funding) then this could cause future impacts of obtaining funding, which could be required to ensure you M&A is successful.
Determine what type of deal
There are different reasons an M&A might take place, which could include either fully acquiring a new firm or merging with another:-
Horizontal – Two companies come together with similar products or services to expand the range but do not offer anything new. For example, an accounting firm might merge with a payroll firm so they can offer the services in house, rather than outsourcing.
Vertical – Two companies join forces but in different parts of the supply chain, to improve the overall logistics, whilst consolidating to reduce costs. This could include examples such as a retail firm buying a manufacturing company or distribution centre.
Conglomerate – Two companies join together (or one is bought by the other) to expand their services but these would be in different types of industries.
In summary, deciding to proceed with a merger or acquisition can be quite daunting, understanding the process and potential financial implications should be considered from the outset. It is important to have a good plan before initiating any deal and conduct detailed due diligence to ensure that the venture is not only financially viable but also the vision is realistic.
Wilkinson Accounting Solutions specialize in offering financial and business due diligence, helping ambitious business owners make informed decisions on their next venture. Contact us today to find out how our services can help you.