Corporate Finance, Deal Advisory
Structuring an M&A deal: An eight step process
Whilst the M&A sector has always been one that thrives, it is widely believed that one of the outcomes from the Covid pandemic will be an increase in the level of activity, especially over the next 12-18 months.
The reason for this is predominantly due to the fact that some business owners will wish to consolidate their position within their particular market sector and try and make acquisitions of weaker competitors. At the same time, some business owners of certain businesses may prefer to effectively sell out at the current time to take advantage of any positive value that may be given the future still has a degree of uncertainty.
Below, we have set out an eight-step process that could be used as part of the structuring process behind any M&A deal and which we hope will be of use to the reader.
1. Develop an acquisition strategy
The acquiror must initially formulate a strategy that defines the parameters of a potential acquisition, including the objective they plan to achieve, the capital they expect to invest, how they will access capital, and who will manage the process.
2. Search for potential targets
Determine the acquisition criteria and identify potential targets. The acquisition criteria defines the characteristics that are required to consider a company for acquisition. Potential targets are often identified via detailed research into the relevant sector.
3. Initial acquisition conversations
The acquiror makes contact with potential targets to assess if there is an acquisition opportunity for one or more targets. This typically involves determining relevant stakeholders’ appetite for an exit and having initial meetings with shareholders and management. Whilst it is important to ensure that the acquisition criteria are met for each target, an acquiror must also have confidence in the sellers and the target’s existing management before moving forward in a process.
4. Perform valuation analysis
The acquiror values the target based on information provided by the target. This information is typically presented in a sales deck (often called an ‘Information Memorandum’), though this may not be the case where the target is not running a formal process. Information that is generally used in conducting a valuation analysis includes P&Ls, forecasts, market analysis, and details about customers. The acquiror will need to determine how they will value the business and will need to conduct research into relevant valuation metrics.
After producing several valuation models of the target, the acquiror presents an initial offer. Negotiations then ensue until a preliminary agreement (HoTs) is reached. The HoTs will outline the headline terms of the acquisition and will form the initial basis for the preparation of the legal documentation. Whilst not legally binding, most sophisticated investors will try to ensure limited deviation from what is outlined in the HoTs (unless something material is discovered in the Due Diligence phase).
6. Due diligence
The acquiror examines and analyses every aspect of the target’s operations – its P+L, balance sheet, client concentration, employment contracts, creditors including potential liabilities, patents including IP, technology, taxation, etc. The list can be extremely long but it is important to keep all the information well categorised and organised. This can be an intense aspect of any process, and it’s often important to manage ‘deal fatigue’ to ensure the acquisition doesn’t falter at this stage. There may be various streams of due diligence, including financial, legal, tax, commercial, regulatory, etc.
7. Purchase, sale contract, and financing
While the due diligence is being completed, the other main step is to execute a final contract for the transaction. The parties make a final decision on the type of agreement and the acquiror provides the financing information and strategy. Lawyers will become more involved in the process with this step and will be responsible for drafting and agreeing on the relevant documentation. The main document, typically called a Share Purchase Agreement (SPA), will provide detail on all of the terms of the deal, including consideration, acquiror protections, completion mechanisms, vendor protections, timings, etc. The SPA is a legally binding document that is agreed upon at exchange/completion.
8. Closing and integration of the acquisition
The acquisition deal completes with the signing of the relevant documentation and the payment of the initial consideration. Management teams will then work together on the process of implementing an efficient integration.
If you are looking for advice on your next steps as a buyer or seller, feel free to contact the Gerald Edelman Deal Advisory team today.