Business Management 101: Mergers and Acquisitions

By Charlie Pecchio

The term “mergers and acquisitions” (M&A) typically includes any acquisition, merger, consolidation, reorganization, capitalization, recapitalization or business combination, or a transaction in which a company obtains capital in the form of equity and/or debt, or in which the company, or a portion of the company, is acquired. No matter what stage your company is currently in, you need to understand all of the aspects of M&A and the options available to you now and in the future.

Even if your company does not anticipate any short-term M&A transactions, your strategic plan should include an M&A strategy that focuses on positioning your company to be a participant in the M&A arena at the appropriate time. You should retain the best professionals you can find for financial and legal matters who should advise you and contribute to your strategic plan and be involved in M&A. Your strategic plan should identify what is required for your company to be in a position to raise capital or qualify on either side (buying or selling) of a potential transaction. Here are some of the many things to consider:

  • Should your company be ISO certified (if you are not already)?
  • Should you have audited financial statements?
  • Should you have an equity participation program for key employees to motivate them and reward them in a potential transaction, and if so, how do you structure it properly?
  • Should you attract some new members to your board of directors to enhance your company’s image and get some valuable business input?
  • Should you consider reinvesting profits or further capitalization or a recapitalization of the company to add capabilities or fund business expansion?
  • Should you aggressively work on strengthening the company identity or even rebrand your company and/or its products and services?
  • Who are the potential M&A targets (both buying and selling) and how could you establish a relationship with each of them that can open the door for a future transaction?

If you are in growth mode, you should create a strategic plan that includes your goals for business expansion. You should identify the organic growth that can be accomplished through business development and adding staff, but you probably will still fall short of the total growth in size and expansion of capabilities required to optimize the value of your company. So, what do you do to achieve those goals and optimize the value without impacting your ability to run the company effectively? What if you’re ready to sell the company, how do you market your company and sell it for the optimum value without losing focus on managing it properly and risking a reduction in value? The simple answer to all these questions is that, just as you rely on professionals to handle legal or financial matters, you should retain an M&A professional to be your experienced guide for this journey.

If you’re already in acquisition mode, you need help to validate your strategic plan, find the acquisition candidates, properly evaluate them, identify the potential risks and rewards, negotiate the deal, direct the due diligence process, create a business integration plan, close the deal and evaluate the results afterward. In today’s economic environment, there are lots of opportunities that may look like great deals, but you shouldn’t rush to buy a distressed company without making sure it fits your overall strategic plan and doing the proper due diligence to identify the potential pitfalls. The true test of whether it was a great deal will be how great it looks a year or two or three after closing.

If you’re ready to sell your company, you need to have someone dedicated to marketing your company without putting up a “For Sale” sign - someone who knows the industry, the players, and how to attract the best suitors. Although you should not put a price tag on your company, you should decide what you will sell it for to the right buyer. You need to set your priorities regarding the deal. In some instances, I’ve had sellers decide to accept a lower offer because a buyer addressed the things that were important to them. Here are some of the considerations:

Are you interested only in the highest price?

  • What other terms of the deal really matter to you?
  • Do you want to keep working for some period of time and on what terms?
  • Do you want to make sure your employees are taken care of? What about your customers?
  • Will you leave “some skin in the game” for a second payday - should it be an all cash deal, all stock or a combination?

A key part of the sales process is to create a Confidential Information Memorandum (CIM) and an Executive Summary (ES). These documents will be used to market the company and are essential to a successful transaction. The ES is a short summary of the CIM that does not identify the company. This is a potential buyer’s first impression of your company and it has to be written so that a buyer gets excited and wants to know more. An interested potential buyer then must sign a confidentiality agreement in order to receive the CIM, which is a detailed document about your company and the opportunity. In my experience, the CIM and ES work best if they are tailored to each of the potential buyers based on that buyer’s priorities. They should even use terminology that the specific potential buyer understands. So, what should be in the CIM? At the very least, it should have everything a potential buyer needs to know to create a desire to know even more. Best case, the CIM should answer all the standard questions a buyer has about the company and manage any potential objections before they are raised. If the CIM really does its job, every qualified potential buyer who reads it should want to acquire the company. Is the CIM critical? You bet your company, it is.

The process of qualifying potential buyers and optimizing and closing the deal can take as little as a few months or as long as a few years. Properly managed, the process can be very smooth and can minimize the impact on you and your operations. Throughout the process, you really have to focus on running your company most effectively so you can achieve all the goals that you included in the CIM, because a potential buyer will continuously monitor how you are performing.

Regardless of which side of the deal you are on, the terms and what happens after closing can be even more important than the events leading up to closing. You often hear about culture clashes when two companies combine. The most important thing is that the companies share common values and principles, especially as they relate to customers and employees. Even if the two companies agree philosophically, you still need to be prepared to handle the emotional integration issues. Also, let’s not forget the financial considerations. Here are just a few:

  • What is the structure of the ongoing payments, if any?
  • What about ongoing liabilities and indemnification?
  • Did you make sure that a tail was purchased for “Directors and Officers” insurance that covers claims that might be made years later?

As Stephen Hebert, the former president of 3001, said, “You’ve got to kiss a lot of frogs and, without an M&A professional to help, you’d be puckered up all the time and not be able to get any business done! Having someone who can help you kiss off unqualified or unwise deals can save you a bunch of time and money and make your company worth a whole lot more.”

Published Monday, June 20th, 2011

Written by Charlie Pecchio

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