This is Part II in my six-part series on the anatomy of an M&A deal from the buyer’s perspective. To read Part I, which covers market analysis and prospecting, click here. I often tell my clients that the first rule of mergers and acquisitions (M&A) transactions is that “you have not sold your business until you have sold your business.” The reverse holds true for buyers: only after you have determined the terms, set the price, concluded negotiations, signed the paperwork, and paid the seller in full have you truly merged with or acquired a company. Until then, every moment is an opportunity to maximize the value of and minimize the risk associated with the purchase. Know that, any binding agreements notwithstanding, you can and should exit a transaction at the first sign of trouble. Why? Consider the other party’s mindset: if the seller is acting in good faith, they should present all liabilities they have not already taken care of (such as poor investments or outdated technology) to you upfront; otherwise, the seller is attempting to deceive and manipulate you. And when it comes to a large-scale purchase, fraud is not only a matter of financial cost—it can have severe legal consequences, too. Accordingly, buyers have two primary tasks at the outset of the deal, and throughout:
- Establish open, honest communication with the seller.
- Gather as much information about the target as possible.
Identifying the Target and Assessing Its Value
Early on, unless the process began with a specific target in mind, the buyer’s team has usually assembled a list of acquisition candidates. Now is the time to shorten the list. Together with your M&A advisor, accountant, and investment banker, assess each target’s…
- Income: How well is the company performing financially? Who are its investors? Are there impediments to its ability to generate cash flow? Look at past and present performance as well as overall market peaks and valleys to calculate projections moving forward. The numbers should speak for themselves, separating the good from the bad investments as well as potentially opening to door to alternative financing and payment structures.
- Competitors: How active is the industry in which the target is involved, from the perspective of an investor or consumer? On average, what are the rates of growth and risk among similar companies? Are there better-positioned organizations that may become more amenable to deal-making in the coming months or years? These details could hasten the transaction or postpone your foray into the market.
- Comparability to other recently-acquired businesses: How much have similar companies recently sold for, and what were the outcomes? M&A markets are as susceptible to trends as any. Do not let hype cloud your judgment.
Looking for Red Flags
Depending on your particular timeframe, goals, and transactional style, the order of opening moves—that is, everything you do before submitting a letter of intent to the seller—varies. Frequently, the steps happen concurrently. You may identify a target before evaluating its price, conduct initial due diligence while communicating with a potential seller, or simultaneously reach out to multiple targets. Whatever the case, my advice is to “look behind the ears”: try to ascertain what is not being said and what assumptions a seller may be making about you. If you know where to look, red flags may become immediately apparent. How easy is it to communicate with the potential seller? How many people do you have to call or email to set up a meeting? Complexity could be a symptom of disorganization, reticence, or even deficient leadership—all signs of a problem-laden transaction down the road. At the same time, be aware of deal momentum. Both parties typically want to move forward quickly, and one handshake leads to another. When you do commit to the sale, you should commit fully, but not before you are equipped with the information and clear conscience you need to begin the deal in earnest. Talk to a lawyer. A qualified business transactions attorney should be engaged at this point to analyze the target’s viability from a negotiation and compliance perspective. An M&A lawyer can also provide insight on matters such as the target’s tax liability, intellectual property portfolio, security preparedness, and so on.
In the third installment of this series, I will examine details to include in a letter of intent, along with proper due diligence and precautionary measures to take before financing and negotiation. Buyers of all experience levels can benefit from partnership with Offit Kurman business transactions attorneys like Michael Mercurio. Since 1987, Offit Kurman Attorneys At Law have been working with clients to achieve their long- and short-term objectives. From pre-transaction planning to closing, we can provide you with the knowledge and confidence to succeed during every stage of the M&A process. To contact me, click here. For more information about Offit Kurman’s business transactions services, click here.
ABOUT MICHAEL N. MERCURIO
Business attorney and M&A lawyer Michael N. Mercurio serves as outside general counsel on matters related to business law, M&A, and real estate law As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on all aspects of business and commerce, with a core specialty in mergers and acquisitions—both from the sell side perspective and buy side perspective. You can also connect with Offit Kurman via Facebook, Twitter, Google+, YouTube, and LinkedIn.
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