Peter A. Saad and Gordon Chan of Loopstra Nixon LLP discuss the main ways in which you can avoid an M&A transaction deteriorating – or even collapsing – and why asking yourself a number of important questions can save a deal before it has even started.
Mergers and acquisitions (M&A) are complex undertakings even when everything goes well. M&A deals are – for the most part – unusual and strenuous activities for a business. They can be extremely risky, with many deals failing to achieve their intended objectives even when all parties are in accordance. When an M&A transaction is abandoned before closing, it can lead to financial losses, damaged reputations, and disrupted operations for a business. In addition to paying transactional costs like advisory and termination fees, a deal team to a transaction may perceive the process as having wasted valuable time and resources to pursue a pointless path. Deal teams certainly do not undertake the analysis for M&A transactions expecting or wanting them to fail. To ensure a successful outcome, the involved parties must adopt a proactive approach and implement effective strategies to avoid potential pitfalls.
While much can be said on how to work towards a successful transaction, there are a number of simple, yet fundamental, steps that can be taken to help ensure a smooth process. The steps and tips to be discussed in this article can at least help a business decide on the best course of action – even if the ultimate outcome means walking away from the deal-table.
Do your due diligence
As one might expect, thorough due diligence is the foundation of a successful transaction. Particular care and attention must be given to undertaking a detailed assessment of the target company's financials, operations, legal and regulatory compliance, customer base, intellectual property, and potential or ongoing risks. Consideration should be given to the deal's price: is the buyer's offer too high; is the seller's offer too low? Sometimes, if a price is too good to be true, it just might be. By conducting thorough due diligence, mispricing a transaction can be spotted before negotiations become more serious. Due diligence can reveal hidden liabilities or operational weaknesses early on in the process, thus preventing any surprises down the road and enabling informed decision-making throughout the deal.
"M&A deals are often subject to unforeseen challenges and changing market conditions."
An erroneous valuation for a business is often the first step as to why an M&A transaction may fail. Numbers and assets that are attractive at first glance may not be representative of the actual operations once the due diligence process has commenced. Puffery or unsubstantiated promises made to boost a purchase price will ultimately be revealed, whether it be by the accountants, bankers, or lawyers. Absent outright fraud, the truth will always be revealed. In these circumstances, transactional trust can be eroded, which can cloud expectations and collaboration going forward. Basing valuation on supporting metrics and being transparent on the valuation process forms a strong baseline to align the parties towards getting an M&A deal over the finish line.
Deals often fall apart due to a lack of effective communication and agreed objectives. Clear communication is essential for any deal to succeed, especially when it comes to each party understanding each other's goals and approaches. Transparent and frequent dialogue will help set everyone's expectations and align everyone's motivations. Particular care should be taken by all parties at the deal's outset to determine what conditions of the deal are absolutely critical and non-negotiable. Many deals often collapse due to one or both parties having not made clear – sometimes even internally – what aspects of the deal they are unwilling or unable to budge on. Both the buyer and seller must communicate openly and transparently with their stakeholders, including employees, customers, and investors. Additionally, it's crucial to align the strategic objectives and vision of both companies to ensure a smooth integration process in the post-closing period. For example, identifying key employees and understanding sensitive areas of the business will ensure that value is retained and processes continue to be efficient post-transaction. Misaligned goals can lead to conflicts and hinder the successful execution of the deal. Active dialogue can assist parties with anticipating trade-offs that may enable each side to work within their defined parameters.
Choose your advisors wisely
There is a well-known maxim in the business world: "There are deal makers and there are deal breakers." As such, it should come as no surprise that engaging experienced legal and financial advisors is one of the most important components to ensuring a successful M&A transaction. Getting the right team on your side can provide valuable insights, help identify potential risks, and navigate complex legal and regulatory issues before they snowball into larger issues. A capable professional team can utilise its expertise to help the parties negotiate fair terms and craft a well-structured agreement that protects the interests of all stakeholders. Conversely, choosing the wrong advisors can sometimes mean the collapse of a deal or – worse still – the completion of a bad one. Another factor is to ensure that the team has the required capacity to complete the job. A larger deal may require drawing on greater resources, and so you should ensure that proper allocation of resources has been identified. Business owners should be vigilant in assembling the best team or best person for the job.
Plan for the worst; hope for the best
Clearly, teams do not enter M&A transactions expecting or wanting them to fail. Nevertheless, M&A deals are often subject to unforeseen challenges and changing market conditions. Maintaining flexibility and having robust contingency plans are critical to adapting to unexpected developments. Buyers should be prepared to modify their strategies if necessary and address any issues promptly to avoid derailing the deal. But most importantly, don't be afraid to walk away from a deal. Whatever the money on the table, it can be more costly to complete a deal that does not meet your needs or which could lead to further disputes in the future. Opportunity cost should not be neglected.
Many a party has approached a deal without fully understanding the toll, cost, and risk that is sometimes involved. There is almost never a sure-fire deal, even in the rosiest of scenarios. All parties involved should always be ready to change their strategy – or even walk away – should things begin to turn sour. But whatever the approach, buyers and sellers should – above all else – ask themselves: "What is important to me, and what parts of this deal are absolutely non-starters?" By making sure that you know the answer to these questions at the outset, you can turn a deal into a successful one before it goes down the wrong path.
Originally published by Chambers And Partners.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.