While merger and acquisition activity has been sluggish for years, things are picking up. 2012 ended strong for M&As, with one of the highest three-month deal totals and the highest three-month spending in the last two years. Is it time for you to consider joining forces with a competitor or complementary business?
Much like getting married, merging businesses can lead to holy matrimony or pure hell. Here are some key considerations to make before saying “I do.”
1. Make the Business Case
Mergers and acquisitions are expensive, time consuming, and loaded with potential problems if not done correctly. “Make sure you clearly understand why you are doing this deal. What do you hope to achieve?” says Robert White Jr., an attorney and shareholder at Gunster who specializes in M&A law.
2. Get the Facts Straight
Are you getting what you think you are? For example, if you’re after the other company’s business contacts and relationships, you’ll have to retain key people after the deal. If the attraction is economies of scale, then cost must be taken out of the system immediately, advises Lynore Abbott, founder of Logical Marketing, who has participated in the acquisitions of several small technology businesses. Determine where the fat is and how best to cut it.
“Visualize the combined operation before the agreements are prepared. Often, these important issues are overlooked until after the deal is done and everyone is looking for ways to contain overhead and reduce expenses,” says David Levy, a litigator at Kleinberg, Kaplan, Wolff & Cohen.
“The small-business owner must nail down the key assets in the merger and make sure they are locked up and protected,” warns Quin Breland, an attorney who specializes in M&A at Baker, Donelson, Bearman, Caldwell & Berkowitz. “Do the key assets include an important piece of technology? A prime market? The merger’s definitive agreement and ancillary documents should protect those key assets both prior to and after the merger,”
Do your due diligence, Levy adds. One of his clients, a regional distributor of pet supplies, was certain that a merger with a pharmaceutical company that makes pet medicines would be a perfect fit. However, during the due diligence process, it was revealed that the owners of the pharmaceutical company had a philosophical aversion to some of the best-selling pet foods that his client distributed. They believed that the products were unhealthy or unsafe.
“Their point was that selling foods which make animals sick is no way to generate business for the meds side of the business. Luckily, the deal scuttled shortly thereafter,” Levy says.
3. Make Sure Company Cultures Mesh
As important as the actual business combination is whether the respective cultures are compatible. If they clash, the result can often splinter the entity, and destroy one, if not both, businesses. “Examine the cultural issues as carefully as if they were a balance sheet item,” Levy recommends.
Quite frankly, “Nobody wants to marry a creep. Will your employees be valued, respected? Unfortunately, sometimes the best financial deal is from the worst buyer. You don’t want to be full of regrets,” says Joe Aberger, author of Selling Your Business: Making the Right Moves, Avoiding the Costly Mistakes.
How difficult will it be to integrate the two companies? “The failure to plan the successful integration is one of the key reasons a M&A fails,” says White.
4. Think the Unthinkable
If things go wrong, it is often harder for small companies to survive. Realize this and plan accordingly. According to White, “An M&A transaction for a small company can easily become a ‘bet the company’ transaction. Be aware that a large percentage of M&A transactions do not work out as well as planned.”
Although a bride and groom rarely anticipate a divorce, planning an exit strategy for your company, much like a prenuptial agreement, is advisable. “If this is the successful business that you built from scratch, ensure its continued existence and success if the merger fails,” Levy says. It’s not unusual, he notes, to see carefully drawn mechanisms for unwinding a merger. Many mergers contemplate parallel operations for some period of time before the “eggs are scrambled” and the merger becomes concrete.
5. Avoid Crucial Mistakes
Before negotiating and signing a letter of intent, seek legal and accounting advice. According to Breland, a seemingly “non-binding” letter of intent often includes binding provisions that can cause difficulties when negotiating the definitive agreement. When a letter of intent includes language such as “best efforts” and “good faith,” the parties are leaving it up to a judge or jury to interpret what that means. A few years ago, says Breland, a large company was hit with a multi-million dollar breach of contract judgment when it backed out of a potential acquisition. The letter of intent included language that each party would use its “best efforts” to consummate the transaction, and when the buyer backed out, the seller filed suit, arguing that it failed to use its best efforts to complete the deal.
Pay attention to confidentiality/non-disclosure provisions. These provisions can seem “boilerplate”, explains Breland, but sometimes each party may have obligations to identify or mark information that is disclosed, and if some disclosed information is inadvertently not marked as “confidential,” the other side may be able to use it freely.
Make sure too, that post-closing issues, such as permit or license transfers, vehicle re-registrations, and new employee contracts, do not get lost in the excitement of the deal closing, says Breland.
What’s the key to a successful transaction? Says Abbott, “Avoid ever saying the words ‘us’ or ‘them’. Talk about where the combined company will be going, ‘Together, we will penetrate this market. Combined, we can now make X. Spend the money up front to enable ‘in-person’ team meetings as much as you think is required. The relationships need to be really strong as the cultures meld. Much of the success depends on the management of the people.”