Business Fundamentals: Mergers & Acquisitions (M&As)

The terms “merger” and “acquisition” each refer to the joining of two companies, but there are key differences between the two.

Merger – Two separate entities combine forces to create a new, joint organization

Acquisition – A company completes the purchase or takeover of another company 

It may surprise you to learn that mergers and acquisition attempts have a very low rate of success. Often, these transactions simply do not go through. According to Harvard Business Review, 70% of would-be owners waste a great amount of resources in a failed process. Of the 30% of M&A  transactions that do go through, only 10% are essentially assured to succeed.

So, what is going wrong?

The involved business owners have failed to invest necessary time and resources into properly preparing for the transaction, or they enter the transaction without critical information. Many enter the negotiation without the experienced team that a seasoned M&A professional can provide. In addition, poor communication throughout the process leads to further breakdown.

Things to consider when preparing for a successful transaction, including merger or acquisition:  

Establish realistic expectations

Sellers must identify and adjust for expenses that are unlikely to be incurred by the next owner, such as removing personal or one-time expenditures, in addition to understanding the most probable value range of the company.

Ensure accurate financials

Create an accurate financial picture of the organization that matches the way prospective buyers will be looking at your company. Be able to present realistic projections for future opportunities and earnings.

Develop an understanding of the buyers’ and sellers’ motivations

Some sellers simply look for the greatest amount of money they can get for their business, while some look to find the perfect buyer for the benefit of their employees and the greater community of their business. Buyers, on the other hand, come in all shapes and sizes, from strategic buyers who provide the same services to investors looking to build and flip.

Be open and honest about everything

Anything that sellers fail to disclose to their advisors and buyers will be uncovered during the due diligence process. Great advisors can offer suggestions to stabilize the situation, help fast-track the process, and maximize the final value within the terms of the deal. Whatever you do, don’t hide anything!

Communicate consistently, transparently, and effectively

The process of a transaction will likely be lengthy, and breakdowns in communication can jeopardize a deal at any stage. It begins with how your company is represented at the time of introductions and must continue successfully throughout negotiations and closing. It is important that one person oversees each step of the process, from introduction to integration. 

Sellers must ensure they have multiple buyer prospects. 

The saying, “don’t put all your eggs in one basket” (one prospective buyer) applies. Ensure there is competition so you have the benefit of critical leverage, and you’ll be less likely to sell yourself short.

Be sure that your legal representation specializes in mergers and acquisitions.

Details and language involved in the transaction are specific to M&A transactions. These details are complex and are simply not a match for most experienced attorneys. It’s likely that buyers have gone through the M&A process multiple times, and sellers must be represented by someone with specific knowledge and experience.