Mergers and acquisitions are complex business processes. Even multi-million dollar businesses occasionally stumble during such negotiations.
However, armed with the right knowledge, even a new entrepreneur can hold their own against seasoned veterans. This article is all about giving you that knowledge, so you can navigate through any pitfalls and complete a successful merger or acquisition.
Let’s now look at what you need to know about mergers and acquisitions, to get you started.
Is it a Merger or an Acquisition?
The first thing is to understand the difference between a merger and an acquisition. We have touched on this topic before, but just to recap, a merger is when two businesses combine to create a new business. An acquisition is when one business buys another so that it owns the target business.
Most mergers are considered friendly in nature. This means that both companies are hoping to merge for mutual benefit.
Acquisitions can be either friendly or hostile. When an acquisition is considered a hostile takeover, this means that either the board or a sizeable number of shareholders do not want the company bought.
What is the Strategy Behind it?
The key concept behind any merger or acquisition is a strategic outcome. This simply refers to the motivation behind the merger or acquisition. Whether you are the buyer of the target business or the owner, you must have a clear, concise idea of what your goals are. A good M&A advisor could provide you with this strategic guidance.
If your goal, as a buyer, is to asset strip a target business of a product, brand, and/or service, and discard the rest, then this will affect your valuation of the business. It may also affect those who own the target business, as they may be determined that their business should be owned by someone who will keep it running as a going concern.
If, on the other hand, it is a merger where both companies will become a new entity and benefit each other, then planning will be required. The merger process should ensure that staff, procedures, and IT infrastructure are encouraged to productively work together, during and after the completed merger.
There are a number of potential strategic outcomes for any business deal, so ensure that you know what your goals and the goals of anyone you are dealing with are, so that you can adapt to and anticipate them.
Compromise is King
It is very rare that either party during the merging or acquiring of a company will get their way completely. Negotiation is important. It is also important to have at least some level of flexibility during conversations so that you can both facilitate a positive outcome. This is especially true during friendly negotiations.
Have a clear goal of what you want and how far you are willing to move on your demands. Going into any negotiation without clear targets and boundaries usually ends in bad deals and fuzzy thinking. Chart a path carefully and head for it.
Getting Due Diligence Right
The most difficult part of any merger or acquisition is due diligence. In a broad sense, due diligence simply means that you have performed enough research to make an informed decision about a business agreement.
In a more focused sense, due diligence can refer to ensuring that a company’s financial records, health and safety standards, and previous business dealings all pass ethical and legal rigor.
It is a mistake to believe that once a merger or acquisition begins, it will inevitably be completed. In fact, whether it is during negotiations or when performing due diligence, more mergers and acquisitions are canceled than fulfilled.
This happens because once a buyer sends in its merger or acquisition team to look at a target business’s financials, legal behavior, and other dealings, issues are found that give the buyer cold feet.
Whether you are buying or selling a business, due diligence is something you need to commit to. Creating a due diligence checklist is a great way to keep you and your team on track. It allows you to see, at a glance, those outstanding components of due diligence which still need your attention.
It should be said, as well, that during due diligence, data protection and discrete conversations are imperative. Either your financial records or the records of another business will be made available to outside eyes. This is usually not public information, and as such, should be treated with the highest confidentiality.
Leaks and the mishandling of sensitive data can often result in the breakdown of negotiations. Trust is a key component of any business deal, especially during mergers.
Keeping legal representation at all times is a must. Your chosen legal representative must also have a background in business law. This will ensure that everything is above board and goes smoothly.
What will the Outcome Be?
Once the proper due diligence has been handled, the deal will either be signed off on or collapse. It should be noted that downsizing is often a direct consequence of any merger or acquisition. This depends on the size and needs of the companies.
When a merger is carried out, there is usually a guarantee that certain employees will retain their jobs and even their positions within the new structure. During an acquisition, especially if it is hostile, it is more likely that either some employees will lose the jobs or the target business will be asset-stripped.
Remember that during the negotiation process, you can always put staff employment and the continuing existence of the target company at the center of your goals.
You can also put in a time-dependent clause which states that the buying company cannot cease trading with the bought company for an agreed time.
As part of the negotiations, you may have secured a position in the newly merged company or part of the acquired company. You may also have been given some stock in this new company.
Make sure that whatever you think you are getting in the deal, you are definitely getting in the deal. Get everything appraised legally. You would not be the first person to fall foul of an unseen loophole.
Learning More About Mergers & Acquisitions
If you want to learn the inside scoop on how entrepreneurs successfully sell and buy businesses, check out The DealMakers Podcast today. You will gain free access to fascinating conversations with some of the world’s leading business people. Conversations which will inspire, entertain, and inform.