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Best Practices for Each Phase of Mergers and Acquisitions

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It’s natural for company owners to explore ways to move their businesses forward. In this post, we’ll describe best practices for each phase of mergers and acquisitions. In many cases, growth means acquiring another company or merging with a similar organization to gain a competitive advantage in the marketplace. However, the process isn’t always easy, and numerous decisions must be made before a merger or acquisition can be completed.

To avoid making errors, it’s crucial to know and understand how to complete the process seamlessly. Business acquisition experts know there are specific steps to follow to avoid problems during any merger or acquisition. Here are just a few of the best practices to adhere to when it’s time to move your company forward.

Create a Strategy

It’s virtually impossible to move forward without first defining what you’re attempting to accomplish and what steps you’re willing to take to achieve those objectives. During this phase, working with a business broker will make it easier to set both short- and long-term goals and define the strategies necessary to reach those goals.

Develop a List of Targets

Once you’ve established your goals and clarified the requisite strategies, the next step is to establish a list of target companies to consider. In some instances, those targets may be on the market, but that’s not always the case. Brokers providing mergers and acquisitions services may also be aware of potential targets that are not currently on the market.

Your business broker will work with you to develop a list of candidate businesses that would be beneficial acquisitions. Depending on your goals, that might mean companies which enhance your strength in a specific niche or allow your organization to expand into other market segments. This might mean buying a business in your supply chain, also known as vertical integration.

Evaluate Potential Targets

Once the basic list is established, best practices require further analysis to determine which targets should be more carefully considered and which ones are less likely to provide the required benefits. In other words, not every potential target will be what it appears to be on the surface.

Some companies will be far too disorganized to make them attractive. Others may not be investing enough in research and development, depending instead on products that are currently successful but may not be in the near future. There are also times when a potential target doesn’t have a culture or customer base that would blend with your objectives.

Contact the Targets

Next, it’s time to contact the targets. When the target is already being marketed, that process is rather simple, and your business broker will certainly handle the initial contacts. In situations where the targeted company isn’t for sale, approaching the owner will require a little more finesse.

Based on the individual situation, the initial contact might be made by the business broker, but there are times when other options might be considered. To obtain the desired results, planning the approach may take time, so don’t be in a hurry. Follow the advice of your business broker and other trusted advisors.

Begin the Valuation Process

At this stage of the process, it’s time to get down to evaluating the nuts and bolts of target company. All companies know they’ll need to provide financial reports to prospective purchasers, but not all companies will be totally upfront with their disclosures. That’s not to say they will falsify documents, but they may choose to obfuscate some less-than-ideal aspects of their financial situation. Let the experts evaluate the financial reports and determine if requesting additional information is warranted.

Having the financial reports and tax returns are important, but it’s also important to identify what assets are being purchased and what those assets are worth. To establish that, various inspectors and appraisers may be used to establish their value.

Make an Offer

After the value of each asset is better established, it’s time to develop an offer, otherwise known as a Letter of Intent or LOI. Again, the business broker will work with you to write an LOI (offer) that defines the selling price and terms. As a best practice, it’s important to have your attorney and accountant review the offer before it’s presented to minimize the potential for errors.

It’s rare for an initial offer to be accepted. The Seller will likely present a counteroffer that you’ll need to consider. Remember, negotiation is an art, which means it’s once again time to look to your business broker and other advisors for advice. They can make it easier to determine if the counteroffer is workable or if additional changes will be necessary.

Conduct the Appropriate Due Diligence

Once a basic agreement is reached, it’s time to make sure all assets and clauses included in the agreement are carefully examined. All legal matters should be reviewed by an M&A attorney to make sure there are no surprises later.

Everything you or your representatives evaluated earlier will be reviewed again to uncover hidden issues or potential problems that could create any type of issue later. For example, errors in past tax returns could, and likely would, cause problems for the purchaser or bank. Performing due diligence takes a lot of time and attention to detail, but the process should never be glossed over.

Closing the Sale

Finally, it’s time to draw up the final contracts and associated paperwork. Again, all paperwork should be reviewed by your legal team and accountants to reduce the odds of any errors in the documentation.

Begin the Integration

This is the final phase of the sale. Here, it’s always crucial to ensure the integration proceeds as smoothly as possible. Remember, the integration should leave the new organization with the best aspects of both the original company and the acquired one. That’s not always easy to accomplish and often takes some time to accomplish. The Purchaser and the Seller may both be involved in the process, depending on the terms of the sales contracts. It’s natural for company owners to explore ways to move their businesses forward. We could write an entire separate post for best practices for each phase of mergers and acquisitions integration process.

Moving Forward Begins Now

Because so much rides on the success of a merger or acquisition, take whatever time is needed to start planning now. If you’re considering acquiring another company or merging, it’s important to contact a business broker for advice. Advance planning can make the difference between a highly successful acquisition and one that provides lackluster results. Keep these best practices for each phase of mergers and acquisitions in mind, when you want to acquire a business to grow your own.

Exit Strategies for Small Business Owners

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A business owner who is ready to leave their business needs to have an exit strategy. The exit strategy is simply how they’ll remove themselves as the owner of the business, how they’ll monetize their business, and how long the exit strategy will take. By working out the exit strategy in advance, small business owners have more control over their futures and the future of the business. Some of the most common exit strategies used by small business owners today include the following:

Liquidation or Walking Away

One strategy small business owners can use is to close the business and liquidate all of the assets to cover any remaining debts. This can be advantageous because it’s possible to close the business and sell off any remaining assets quickly, but it can have disadvantages as well. There is not going to be a high return on assets for the owner, and the only money they’ll receive is the money from the liquidation sale. Even when the economy is doing well, it may be difficult to get good prices for machinery or equipment the business is selling. Plus, when money is obtained, it must go to repaying debts, while anything remaining goes to the business owner.

Keep it in the Family

Some business owners may want to give or sell the business to a family owner. This could lead to a potentially smooth transaction, especially if the family member has already been a part of the business and knows what is needed to manage the business successfully. It also can allow the small business owner to continue to work in an advisory position. The downside to this is that the family members may not want to take over the business or may not have the appropriate skills to do so.

Selling to an Employee

It is possible to sell the company to current employees or managers who may be interested. The employees or managers are already familiar with the business, so they’re likely to want the business to succeed. If this is done over a long period of time, it can increase employee loyalty, as well. Unfortunately, there may not be an employee or manager who is qualified to own the business, and there may be an issue with financing the sale. Along with this, there’s the potential for clients to be dissatisfied with the new ownership or any changes in how the business is run.

Selling on the Open Market

The most popular way to sell a business is on the open market. This is also often the easiest way to sell a business, as a business broker can handle a lot of the work. If a business owner is ready to retire or wants to try something new, they can engage a business broker and look for the right buyer. This can help maximize the return for the business owner.  However, there is a lot that can influence the price of the sale. With the right business broker to help, a business valuation can be done to determine the best selling price and to potentially sell the business faster. Business owners who want to sell on the open market would be advised to work with a business broker, so they can get the best terms and profit as much as possible during the sale of the business.

Bankruptcy

While no one wants to file for bankruptcy, it does provide the opportunity to get out of a bad situation. If bankruptcy is necessary to sell the business, working with a bankruptcy attorney can allow the business owner to file and start liquidating the business. Once the bankruptcy is complete, the business owner can potentially have business debts settled.  Psychologically, it may be satisfying to not have the same responsibilities, anymore. However, it can impact their ability to obtain credit in the future and can end the relationship with suppliers, clients, and customers. If the business owner wants to open a new business in the future, the end of important relationships can be an issue.

Going Public With an IPO

Depending on the size of the business, it may be possible to go public through an IPO. This can be extremely profitable, but it is not fast. Most businesses typically take many years to build enough scale to sell to the public through an IPO.  Also, depending on the structure of the IPO, the business owner may have to wait to be able to sell their shares during what is called the “lockup” period. It’s also important to be aware, before deciding on this exit strategy, that there are higher compliance and reporting standards for a company that is public. Plus, Dodd-Frank laws state that an owner could be held personally liable for fraudulent accounting of the business, even if they were not directly involved, or any failure to disclose certain issues with the business when it goes public.

Merger or Acquisition

Mergers and acquisitions are other options for small business owners to consider. For a merger, the business owner will likely need to continue being a part of the business, for at least a transition period, so they will not be able to walk away right after the merger is done. With an acquisition, however, the business is purchased by another business. In this case, the owner will sell the business to the other company, and the other company will combine it with their own. While there will likely still be a transition period, the expectation may be that the former Owner may be able to leave, after a short transition period.  One of the downsides to acquisition is that the small business owner may need to sign a non-compete agreement, meaning they can’t open a new business in the same industry for multiple years.

When it’s time to leave a business, whether to retire or start something new, finding the right exit strategy is a must. While some of these are not desirable, like filing for bankruptcy, there are options to account for just about any situation. To get a larger profit or to make sure the business sells quickly, working with a business broker to sell the business on the open market may be the best solution. Talk to a business broker today to find out how much your business could be worth or to find out what is needed to sell your business or what exit strategies are best.

A Guide to the Mergers and Acquisitions Advisory Firm’s Role in Business Sales

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When an entrepreneur decides to sell their business, it’s usually a bad idea to jump into M&A (mergers and acquisitions) without the help of a knowledgeable, experienced mergers and acquisitions advisory firm. A business owner can prepare for the sale process by retaining an advisor, and as long as that person is qualified for the job, the ROI is often high. The difficulty of selling a business while trying to run it, and the disadvantages of going through the M&A process and leaving empty-handed, are some of the biggest reasons to hire an advisor. Read on to learn more about advisors’ fee structures, the vetting process, and role in business sales.

Fees For M&A Advisors

An advisor typically sees their biggest payout when a deal is closed. Known as a success fee, this payout is often based on the transaction’s final price. Success fees are usually negotiated by the advisor and the business owner when the relationship is formalized. If the contract calls for a percentage of the sale price, the advisor is motivated to maximize the transaction’s value for the business owner. Along with success fees, many established M&A advisors require upfront or monthly retainer fees, which assure the seller’s commitment to the process. CGK Business Sales does not charge retainer fees. We are only paid upon the sale of the business.

Vetting a Mergers and Acquisitions Advisor

Business owners should carefully examine a potential advisor’s competence, experience, and reputation before signing a letter of engagement. Sellers should look for a positive history of past deals, testimonials from past clients, and endorsements from other industry professionals. When advisors have worked in similar industries, they may be more acquainted with potential buyers.

The Advisor’s Role in Preparing a Company for Sale

A considerable amount of work goes into preparing the target market before a sales pitch is made, and adequate financial information is crucial. Many mergers and acquisitions advisory experts will insist that their clients have the company’s financial statements adjusted and reviewed by a CPA if the owner does their own accounting. All advisors want to ensure that potential buyers understand how much Seller’s Discretionary Earnings (SDE) the business produces each year. This type of analysis goes beyond just seeing how balance sheets are connected to their income statements. Beyond financial information, an M&A advisor should ensure that physical locations are properly maintained. Post closing, getting key suppliers and customers on board is another important task, as potential buyers will want some level of assurance that current customers will stay as the company changes hands.

Getting the Company to Market

During the most prominent part of the process, the mergers and acquisitions advisory firm puts the company “on the market” and chooses a method that maximizes the seller’s chances of success. In many cases, this involves contacting potential buyers to gauge their interest. Advisors should manage the process efficiently by qualifying buyers based on seriousness, expertise, and available capital. Depending on the target company’s time requirements and other features, an advisor may decide to market the business to a limited number of potential buyers at one time. No two companies are the same, and an expert advisor will treat every sale differently.

Finalizing the Deal

Finally, selling clients should be confident that an M&A advisor can help them negotiate terms, including structures, escrows, tipping baskets, seller financing, reserves, and other important issues. If contingent payments, non-compete clauses, or consulting contracts are needed, an advisor can help a seller formalize these components with the help of an attorney, as well.

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CGK Business Sales

401 Congress Ave

Austin, TX 78701

phone: (512) 900-3770

website: https://businessbrokersaustin.com