Mergers and acquisition are an important milestone in a company’s path. Companies merge into each other to form a symbiotic relationship and gain synergies. There are a lot many aspects to mergers and acquisitions which involves financial, legal, intellectual property, assets and human resource oriented issues. For the successful fruition of the acquisition or merger, the company needs to consider all these elements and have complete knowledge for this.
The complexity of matters increase in case of private companies because of limited information available. Here is a list of important things that a company should consider in case of mergers and acquisitions of privately held companies.
(1) The entire process can take a long time to close
Mergers and acquisitions are a cumbersome process and involves many formalities. The entire cycle from inception to completion can spread around a period of 6 months on an average. The speed of execution also depends on the buyer’s or the other merging entity’s urgency of getting things done or performing the due diligence. The time lag also happens if a seller is unable to get enough buyers interested for the company. Certain ways to shorten the delay are:
- The investment bankers can be used to run an auction sale process in a tightly controlled-environment so that the buyers are compelled to make decisions in a shorter time frame.
- A key component of an M&A agreement is the draft disclosure schedule. Having it ready in place by the seller is a great way to save time.
- The seller should compile all its details such as key personnel, financial statements, corporate records, investment pitches, financial models, company presentations etc. and keep it ready in hand.
(2) Buyer will be majorly interested in the seller company’s financial statements and projections
One representation that a buyer is most likely to demand from the seller in an acquisition agreement is the financial model of the company. The financial statements should be audited, in compliance with the accounting guidelines and the seller must present the information in a fair and transparent manner. The result of operations, financial situation, and periodic cash flows are the primary information that the buyers seek. The financial projections will also be considered and the credibility of the projection will also be scrutinised.
(3) Multiple bidders are needed to get the best deal for the seller
To conclude a sales deal, it is important that there are multiple bidders who have the potential to buy the company. If the situation is competitive, the seller can make the most of the situation and strike a better deal, get a higher price, and much more. If there is a single bidder, the situation becomes disadvantageous for the seller. This is especially true if there is an exclusivity agreement that restricts the seller from getting in talks with other buyers. Negotiating with multiple buyers helps in the better deal terms.
(4) You need to have a powerful legal team in place
It is crucial that for a successful M&A process, the selling company hires an external legal officer who specialises in mergers and acquisitions. The external legal team must consists of experienced M&A lawyers who has expertise in areas like tax, employee affairs, real estate, cybersecurity, antitrust, international trade, and data privacy. The terms of the deal have legal complexities, therefore it is imperative that the M&A lawyer must be adept with the nuances of the deal and the detailed structure of the acquisition agreement.
(5) Intellectual Property is very important
The position of the Intellectual Property of the seller and the way it will be received by the buyer is an important point of consideration during the M&A deals. Buyers audit all the IPs of the seller’s company and the latter has to be prepared for it. The IP plays a crucial role in deciding the valuation of the buyer’s company. The IP representation and warranties ensure that there is no misappropriation, infringement or violation of the IP rights of the selling company.
(6) A definite acquisition agreement is mandatory
A well-drafted acquisition agreement is very important to safeguard the interests of the seller and buyer. The acquisition agreement must have the following components:
- Structure of the transaction (share purchase, asset purchase or merger)
- Purchase price and related terms of finance
- Any possible deviations or adjustments in the valuation of the deal
- The extent of rights and restrictions on the stock, in cases it is issued to the selling stockholders.
(7) Making sense of the dynamics of negotiation
There are a lot of compromises that are required in M&A deals. It needs to be seen which party is more interested in the deal? If there is a presence of multiple bidders? if there is any non-financial element that can be negotiated in lieu of increased price? Is there an M&A negotiator in place? Is the deal attractive enough for the sellers to consider all the risks?
Understanding each of the dynamics and the necessary elements in an M&A deal is essential for the successful completion of the deal with due professionalism.