5 Things Business Owners Should Know Before Entering Into an M&A Deal
If you’re considering a merger or acquisition for your business, it’s important to fully understand the process, benefits and drawbacks before signing on the dotted line. The term “M&A” can refer to a wide range of transactions, from corporate purchases and sales to mergers and consolidations. Each of these transaction types has its own benefits and downsides. Some offer an opportunity to grow, expand or realign a business, while others provide needed capital to keep a business afloat during difficult economic times.
Regardless of your reason for pursuing a merger or acquisition, following are five important things you should know before entering into an M&A deal.
#1 – There are several different types of agreements that fall under the M&A umbrella.
M&A can encompass different types of business transactions, including:
- Mergers – In a merger, the owners of two or more companies agree to combine their businesses in an effort to expand their operations, access additional customers and/or achieve scale and cost efficiencies within their operations. Mergers typically occur among companies of similar size and earnings. Following the merger, the individual companies no longer exist and a new company is launched. For larger businesses, a merger must be approved by each company’s board of directors and shareholders.
- Acquisitions – An acquisition usually occurs when a larger or more profitable company seeks to purchase most or all of another company’s shares in order to gain control of the smaller business. This could be an acquisition to acquire the workforce, technology or market share, much like a merger. If the acquiring company purchases 100% of the other company, the acquired business becomes wholly owned by the acquiring company. In our current marketplace, private equity and synergistic buyers are also active in the acquisition arena. Their goal may be to just grow a bunch of smaller companies into one larger company and then offer it for sale in the open market. The acquisition area is where we see most of the M&A activity today.
#2 – M&A deals should be driven by a business’ goals.
Any potential M&A deal should be driven, first and foremost, by a business’s specific needs and goals for the future. That’s why it’s important to start the process with a clear vision of what you hope to accomplish. Following are several common objectives of business owners entering into an M&A agreement:
- To fuel growth and expand market share – One of the most common reasons to pursue a merger or acquisition is to access new customers and fuel growth. M&A’s can provide businesses with access to new industries or sectors, different product lines, enhanced technology, intellectual property, capital needed for growth, and/or new customers.
- To better compete in a crowded marketplace – Sometimes one of the best ways to survive competitors is by joining forces. This can be a particularly effective strategy for a company that was late in adopting new technology or efficiencies. A business owner may decide the only way to survive is by buying another company or selling the business to a more successful competitor.
- To access innovation – In some situations, a merger or acquisition provides access to innovation significantly faster than an organic investment in developing it on your own.
- To exit a business – Frequently, a business owner simply wants to retire or pursue other opportunities. Selling a company through either an asset or equity sale allows business owners to access capital to fund their retirement or a new business opportunity. Getting a business valuation is a great first step when beginning this process.
#3 – M&A transactions are subject to complex legal and regulatory requirements.
M&A transactions can quickly become complex undertakings, thanks to a wide range of legal and regulatory requirements. Before you enter into an agreement, make sure you fully understand all regulations related to data protection requirements, competition law, employment law, corporate governance standards, etc. Consider consulting with a M&A advisor, a tax consultant and a lawyer to assist with the process and help ensure all your bases are covered.
#4 – It’s important to consider the impact on employees.
M&A transactions can have a significant impact on employees. As you enter into discussions, be sure to consider how each decision may impact those who work for you. Make a plan to address employee redundancies, employment transfers, compensation, severance packages, benefits and more. Also, when the time is appropriate, get information to your employees regarding the merger or acquisition. It’s human nature to not like change, and the more you prepare your employees for the change, the less chance you have of them leaving the company. Remember, your workforce can be (and usually is) one of your most valuable assets.
