A Buyer’s Guide to Intermediate Steps in Mergers or Acquisitions

You are a leader in a small to medium-sized company. Along with your executive peers, you are trying to determine the next steps for growth. You could create a new product, add additional services, replicate your business model, etc. One idea is to either merge or acquire a company that has complementary competencies to your own and similar products. After thinking about the company strategically, you decide that merging or acquiring this other company is the best next step, but what to do next?

After conceptualizing a merger or acquisition and deciding it, on paper, seems like a good idea, many leaders don’t know what to do next. We submit that there are three important future steps when further evaluating the potential deal:

 

  1. Conduct Due Diligence

In every merger or acquisition, some of the most-contested points in negotiation arise from the representations and warranties made by both parties. On the one hand, the Buyer wants to purchase the entity without its liability baggage, but on the other, the Seller doesn’t want to be left taking care of costly litigation or disputes after the merger or sale. After a Buyer has picked the target company, it absolutely needs to conduct as much due diligence as possible. This can be accomplished in the form of research about the company in the public record—has the company been sued in the past or recently, what sorts of reported disputes as the company been involved in, what information is available on the size of the company’s financial and legal liabilities?

Buyers should consider every kind of liability they face in their own line of business in addition to liabilities they haven’t yet encountered and try to find as much information as is available about the target company on these points. In some cases, an interested Buyer may be able to create a confidential relationship (Confidentiality Agreement) with the target company to learn more about the specifics. In whatever ways due diligence is accomplished, it is absolutely essential that Buyers are aware of any specific risks involved in merging with or acquiring the target company because these risks will be important issues in negotiations and contracts.

 

  1. Evaluate the Soft, Intangible Challenges

Beyond the hard facts important to a merger or acquisitions, Buyers should also consider soft, intangible challenges such as whether or not the target company’s strategic priorities already align with the Buyer’s.  If not, Buyers need to evaluate whether the company’s mission and vision can be adapted to complement their business. Are there strengths that can be leveraged? Are there any areas in which the companies are in direct competition, creating a risk of cannibalization after a merger or acquisition? What about relationships the target company has with other businesses—are those valuable to the Buyer in the long-term? Could they be? Most importantly, what is the culture of the target company like? Organizationally, will it be able to adapt to changes, or will its existing structure conform well with the Buyer’s organizational hierarchy? And if none of these things end up happening, is an exit possible after a merger or acquisition? These issues are often overlooked by Buyers.

 

  1. Create a timeline

Lastly, leaders at a Buyer company need to think about when they want the merger or acquisition to take place. Negotiations can take months and even years, unless either party has a strong interest in meeting milestones. Timing may be the most over-looked consideration in a merger and acquisition, but it has powerful ramifications that affect everything from taxes to competitive strategy. When Buyers start a merger or acquisition process with set goals for closing dates and dates in which both companies will perform different aspects of the agreement, they are much more likely to finish a deal by that date and ensure the merger and acquisition process is smooth in the short-term transition and, hopefully, the long-term financial success of the now-larger company.

This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you are a business leader and would like a free legal consultation to get started on the right footing in everything from your sales to mergers and acquisition, contact us.

 

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