If your company is about to embark on a merger and acquisition process, you may be experiencing conflicting feelings. Although the prospect of something new is exciting, the endeavor is complex, involves unknowns, and results in change, all of which can be scary. Having worked on both the sell-side and buy-side of mergers and acquisitions (M&As), I have seen results unfold in many ways. Of course, there are many variables in an M&A process, and no two deals are the same, but here is what to expect at a very high level.
Mergers and Acquisitions: An Overview
Mergers and acquisitions involve buying, selling, or combining a company, a portion of a company, or significant company assets (such as patents or a factory). Although the words merger and acquisition have different meanings, we often combine them because all M&A transactions result in a legal change of ownership or control over a business asset and require similar knowledge, skillsets, and process steps to complete successfully.
Why Do Companies Engage in M&A Processes?
Business owners engage in merger and acquisition processes for many reasons, and the buyer and seller will each have a different perspective.
On the buy side, the goal is usually growth. If you are a business owner or investor and want to do more, you can either build something from the ground up or buy what you want from another business owner. Analyzing the costs and benefits can help you make the right choice.
From the sell side, goals vary. Sometimes, business owners build and grow successful organizations and then pursue an M&A strategy because they are ready to retire or do something else. There are also cases where a business has fallen on hard times, and the owner needs outside help to get it straightened out. Other times, an organization may have a portion of its business that it no longer needs or wants to focus on. In this situation, the owner might choose to sell that part of the company to concentrate on what remains.
While perhaps not typically considered under the M&A umbrella, capital-raising efforts also follow a similar process and require many of the same skills to complete. Such activities will be informed by most of the same considerations relevant to an M&A process.
Who Should Be on Your M&A Team?
Let’s say you have decided that a merger and acquisition process could be in your future. What should you do next? Although some large organizations that buy and sell regularly employ an entire M&A team, most small-to-mid-sized business owners do not transact frequently and must build one primarily of third-party advisors.
The team is roughly the same whether you are on the buy side or sell side of a transaction. The internal deal team usually includes the owner, CFO, general counsel, board of directors, and other senior managers (on a need-to-know basis). The external M&A deal team typically consists of the following:
- An investment banker, M&A advisor, or business broker (depending on the deal type and size)
- Legal experts (M&A, legal diligence, tax, etc.)
- Accountants (accounting reviews, financial diligence, etc.)
- Any necessary specialty consultants or subject matter experts
- Lenders or investors to finance the deal (though typically only on the buy side)
Although the number of team members may seem overwhelming, you can often stage participation as needed. However, one essential role to fill early on is someone with extensive M&A experience who can manage the team and quarterback the process, thus minimizing the impact of the transaction on those charged with running the business day-to-day. Often, this will be your CFO, a fractional CFO, or a strategic finance professional explicitly hired for this purpose.
Merger and Acquisition Steps (Sell Side or Buy Side)
Once launched, the actual transaction can happen relatively quickly, but preparation is critical to a smooth process and optimal outcome. Therefore, before going to market, we encourage business owners to plan on spending at least a couple of calendar quarters, if not up to a year, getting ready. Again, the actual sequence for an individual transaction can vary significantly depending on many factors, such as whether the seller is running a broad or focused process. But here are the basic steps.
1. The Planning Phase
Every step of the M&A process matters, but as I mentioned above, planning is vital because it allows you to prepare yourself, your team, and your company ahead of the sale or purchase. In M&A, as in life, the better prepared you are, the more responsive you can be, and the more momentum you can maintain. That makes it more likely that you will find a good match, negotiate a great deal, successfully close the sales process, and navigate a smooth transition.
That is true whether on the sell side or the buy side.
The Sell Side
For the seller, the planning phase is your opportunity to strengthen your business profile and prepare for buyer questions before embarking on the sales process.
Smart sellers often use this time to engage outside consultants in the process of “value creation,” remedying items that would be viewed by potential buyers as shortcomings in the business and refocusing on positives to maximize enterprise value and transaction certainty. This exercise will include a review of your products and market positioning, the strength of your team, customer attributes, operational processes, and the business’s financial profile, to name a few focus areas. Sellers may also engage some of the same types of consultants that a buyer will (such as an accounting firm to conduct a quality of earnings assessment) to avoid surprises later in the process or prepare to refute findings that a buyer may allege. The planning phase is also when individual owners should evaluate their personal financial objectives and engage in estate planning.
During this time, your deal quarterback will also perform other essential tasks, such as the following:
- Assembling and managing the deal team (including your investment banker, lawyers, and external accountants)
- Leading the preparation of marketing materials
- Curating due diligence materials and populating a virtual data room
- Assisting with identifying suitable potential buyers
- Working with the deal team to coordinate buyer diligence
- Assisting in structuring the transaction
- Helping you think about transition plans
The Buy Side
For the buyer, the planning phase starts with specifying what you wish to acquire and why. For instance, if your company operates in a saturated market and elects to buy a competitor to grow, your answer to this question will be easy. However, for others, it may be more complex. You must also evaluate how you will pay for and integrate the acquisition.
Once you clarify your goals, you will prepare your company to navigate the sales process. Presuming you run a small-to-mid-sized organization without an internal M&A team, you will assess your resources and potentially reallocate priorities and responsibilities. Then, you will look for any additional help you may need.
Finally, you will search for acquisition targets by researching industries, talking with bankers, brokers, or other industry experts, or beginning discussions with companies directly.
2. The Transaction Phase
When you feel ready to move forward with the M&A process, the execution phase begins. Again, the steps below can vary depending on the nature of the deal. For instance, if the buyer and seller know each other well, they might streamline this process significantly.
Another item to remember is that your responsiveness during this undertaking can make or break the deal, so this is where your preparation will help. Emotions can run high during these interactions, but if you are ready and can quickly reply to requests for information, you will appear more credible and build trust with the other party.
With that in mind, below is the general flow of this phase.
1. First Contact
Each party will begin its search, reaching out to its list of target companies and networks to find candidates. Active sellers will share a short, one-to-two-page “teaser” with high-level information about the asset for sale.
2. Non-disclosure Agreement (NDA) and Confidential Information Memorandum (CIM)
Assuming there is interest in proceeding, the seller will ask buyers to sign a non-disclosure agreement, or NDA, before sharing a more detailed document or presentation (sometimes up to 100 pages) regarding the business. Then, interested buyers will craft and submit a non-binding Indication of Interest (IOI).
The Indication of Interest specifies how much the buyer is willing to pay and summarizes their assumptions, terms, and conditions based on the information presented in the CIM. The IOI allows the seller to evaluate a more focused group of credible potential buyers before revealing more sensitive information and engaging management’s time in detailed due diligence.
3. Management Presentations and Detailed Due Diligence (Data Room Access)
The seller will then invite a select group of buyers (typically two to five) to the next phase of the process. Buyers will meet with management and gain access to the seller’s virtual data room to review even more detailed information about the company.
At this stage, buyers will engage in a due diligence process. They will scrutinize everything, including historical financials and projections, business plans, the inner workings of the business, legal documents, assets, liabilities, technologies, the team, and more. As the process becomes more interactive, your preparation really begins to pay off as you address inquiries. Please read our blog post on how to prepare for due diligence for more insight into this exercise and a free checklist.
4. Confirmatory Diligence, Negotiations, Legalities, and Financing
After buyers conduct due diligence, those who remain interested submit a Letter of Intent (LOI). The LOI typically builds on the original IOI but goes into greater detail about the price, terms, and conditions at which each party is willing to transact, given the information shared to date.
Typically, the seller selects one or two interested buyers to negotiate with and signs a LOI with one. Although an LOI is not the final contract, there are usually binding components. The seller may grant a period of exclusivity to the selected potential buyer to perform confirmatory diligence. Until this point, most of the information the buyer received was seller-prepared, and the buyer will have held off spending money on accountants and lawyers to confirm the quality of the financials, review critical corporate documents and contracts, etc. Granting exclusivity gives the buyer comfort in their standing with the seller to spend money on these critical final items.
Finally, the buyer and seller will prepare and negotiate the definitive transaction documents (the purchase agreement). Buyers will also finalize any needed financing arrangements. Then, both parties review all transaction documents closely before signing and closing the deal.
Regarding timing, from first contact to delivering an IOI, it can take a few weeks to a month or more. Detailed diligence may take another month or two before the delivery of an LOI. Then, exclusivity and final negotiations can span one to three months. Therefore, for a typical middle market transaction without significant regulatory or corporate approval processes, you can expect the transaction phase to take 3-6 months or more.
3. Post-Closing Integration
Post-closing integration will occur after both parties sign on the dotted line and the transaction closes. The exact nature of this phase will depend on the terms and conditions negotiated in the transaction agreement. Sometimes, buyers require minimal transition services from the seller. Other times, sellers agree to remain with the acquired company for an extended period to help ensure a smooth integration.
The Bottom Line
Merger and acquisition processes are complex, effort-intensive, and highly variable. But they do not need to be intimidating. At The CEO’s Right Hand, we have helped many companies prepare for and complete diverse and complicated M&A processes. We encourage you to reach out to discuss how we can help you.
