We often hear from business owners once they’ve already met with their potential buyer, but it is important to talk with your business attorney long before you begin discussions with a potential purchaser. Below are questions to consider before you begin merger and acquisition discussions.
1. How does a potential merger and acquisition transaction fit in my strategic plan?
An M&A transaction, whether a sale, acquisition or joint venture, should only be considered in order to further the strategic interests of your company. If the deal is not going to increase market share or profitability, add production capacity, enhance operational efficiencies or achieve your exit or retirement objectives, why should you subject yourself to the extra effort and expense of pursuing an M&A transaction? Deals premised on hypothetical post-merger synergies, opportunities "too good to pass up", or management hubris are likely doomed to failure.
2. Is now the right time for an M&A transaction?
The right time to do a deal is an ethereal concept. You need to assess whether your company is prepared to withstand the intense due diligence scrutiny that the deal partner will impose. Do you have your financial house in order, your important contracts and relationships firmed up and your executive team and employees reliably situated? Also, you need to consider if this is the right time from a market perspective, both in a macro-economic sense and in an industry specific sense. Ask if the M&A market is currently active, with high multiples being paid and plenty of cash to finance deals. Or is it a buyers’ market, with plenty of eager sellers from which to choose?
3. What are the risks of commencing an M&A transaction?
The M&A deal-making process is intensive, expensive and stressful. In the case of a seller, there are additional stresses relating to family and emotional factors. And if the deal fails to close, it can be damaging or destructive to your business, causing lost employees or customers, compromise of your competitive market position, and potential loss of proprietary information or trade secret assets to a competitor. From a buyer’s perspective, such a "busted deal" may result in an expensive lost opportunity, loss of reputation in the market and loss of shareholders’ confidence in management.
4. How do I go about entering into the M&A process?
An M&A transaction is no place for inexperienced players. Your first step should be to assemble a team of experienced advisors, including financial advisors, tax and accounting advisors and legal counsel. This team must be coordinated and directed by you, and you should make every effort to instill in the team your motivation and objectives for making a deal. You are the client and the ultimate decision-maker in the process, but your decisions can only be as good as the options presented and articulated to you by your advisors.
5. What problems might be experienced post-merger?
The potential problem most discussed by lawyers, and in my experience, the least likely to occur, is a breach of representation or warranty which gives rise to post-closing indemnification liability on the breaching party, usually the seller. Much more likely is frustration of expectations for the deal due to the failure to achieve effective post-closing integration of the parties. Every company has unique systems and processes which present integration challenges. Many deals present challenges relating to the integration of the parties’ respective management teams and key employees. It cannot be overstated that potential integration challenges need to be identified and dealt with as soon as possible in the deal process. This is one area where a failure to prepare will likely result in preparing for failure.
Our best advice to a business owner contemplating the sale of their business is to prepare for the sale now by consulting your attorney and other trusted business advisors. For more information, or to discuss the sale of your business, please contact Jim Rench, or your Stark & Knoll attorney, at 330-376-3300 or info@stark-knoll.com.