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M&A Process: Top 10 Steps for Successful Mergers & Acquisitions

Commercial & Corporate Law

updated:
1.17.22
company acquisition

Looking to buy a prosperous, healthy business? If you have one, you may be considering selling it. While this is a good position to be in, preparing a company for acquisition can be a daunting process. No matter the reason why you decide to sell or buy a business, the preparation phase of M&A transactions is critical. To maximize value and ensure critical steps aren’t missed, it is advisable to seek qualified representation from a Colorado M&A lawyer early in the business acquisition process.

This guide will cover how to handle the challenges of the company acquisition process and the steps for successful mergers & acquisitions.

What Is a Business Merger and Acquisition Process?

Mergers and Acquisitions (M&A) is an umbrella term that refers to the process of combining business entities and assets through business transactions. M&A transactions have parallels to sales of real estate in that there is an offer, inspection period, potential renegotiations, and closing. The M&A process timeline can take weeks, months, or years, and may require shareholder or regulatory approval. In some instances, opposition from advocacy groups can be robust, as we saw in Elon Musk’s 2022 attempt to acquire Twitter.

Who Is Involved in the M&A Processes?

Both mergers and acquisitions involve two companies coming together - a buyer and a seller (the target company). Below is a list of the principal parties involved in a private M&A transaction:

  • Owners: The owners of the company can be the shareholders, members or limited partners of the company depending on its structure.  They are the ultimate owners and decision-makers who sign off on the deal. Depending on the company structure, a Board of Directors or Managers may also be involved to manage the deal and carry out the wishes of the shareholders/owners.  
  • Chief Executive Officer (CEO): The CEO is in charge of the day to day operations of the company and executing on the company’s strategic plan.  They are a key member of any deal team.
  • Chief Financial Officer (CFO): A vital participant in any deal, the CFO works on the transaction, due diligence, and post-merger or post-acquisition integration
  • Financial Advisors / Investment Bankers.
  • M&A Attorneys / Corporate Lawyers.

Large transactions, or deals with complex integrations, may require more industry consultants, external advisors, and other individuals with roles and responsibilities in the transaction. The need for additional assistance from outside individuals or parties will depend on the nature of the transaction, and your and your attorneys’ familiarity with the type of transaction and the specific acquisition process steps. Understanding the roles of stakeholders involved in your transaction early is necessary to derive maximum value for your transaction.

Considerations for Executing M&A

m&a processes

Executing successful M&A deals is not always easy, and some factors are simply out of your control. A company acquisition that seems good on paper or in theory may not integrate well in real life. Sometimes the companies that seem like suitable targets for acquisitions are just too expensive to acquire or operate. Below are some considerations to make when thinking about an M&A deal.

  • Synergies: Whichever side of the deal you are on, think about why the other party wants to do the deal and how the transaction benefits them. Is there a greater benefit to them than you?
  • Financing/loans: Your deal must work not just for the buyer and seller, but also for the funding source. With an acquisition, there may be flexibility to use leverageable assets like intellectual property or real estate as financing options. However, you still may assume significant debt or may require substantial cash at closing.
  • Competing bidders: Don’t assume you are the only individual or entity interested in the target company. Will other bidders drive the price up?
  • Conditions of the market: Market position is the public’s perception of the company in relation to competitors.
  • The health of the target company: Does the target company have pending or threatened litigation? Companies willing to take on the risks of imminent litigation may receive a significant discount.
  • Laws: Would the transaction violate any laws or exclusivity agreements?

Be careful not to go after a deal for emotional reasons, or simply because you (or your employees) do not want to miss out on it - a case of real-life FOMO (fear of missing out).

What Are the Steps in the Merger and Acquisition Business Process?

M&A is a step-by-step process that can vary in length depending on the parties involved. It is important to stay organized, as issues and curveballs can arise at any point during the process. Steps for merger and acquisition in the acquisition process timeline are detailed below.

Steps on the Buy Side of an M&A

Steps for acquisition of a company on the buyer side of an M&A include

  1. Establish Your Strategy: Consider what you’re hoping to accomplish, and what you need to do to get there. A primary consideration is obtaining funding.
  2. Identify and Contact Potential Target Companies: Develop search criteria for the acquisition of a company (industry, geographic location, cash flow and revenue, intellectual property, etc.).
  3. Exchange Initial Information: Information will be exchanged as the buyer needs to know what they’re getting, and the seller doesn’t want to stand in the way of the sale occurring, but will want to make sure its confidential information is protected. . Parties must avoid creating antitrust liability when exchanging competitively sensitive information.
  4. Value a Company and Recognize Synergies (Valuation Analysis): Valuation analysis involves investigating, evaluating, and understanding the utility and value of the company. Synergies are efficiencies, such as access to supply, a new fleet of vehicles to use, and an expanded customer base. If you are not experienced with valuation and projection, have a knowledgeable M&A expert or financial consultant assist you.
  5. Verify and Investigate (Due Diligence): After the initial exchange of information, more due diligence must verify the claims made by the seller. For example, if a company claims to have 5,000 paying clients, documentation should be verified. If a company owns patents or other intellectual property, the existence of those should be reviewed. If a company claims to have 2 million Instagram followers, make sure they are real followers and not fake users or bots.
  6. Offer and Negotiation: After everything you know, parties must come to a final agreement on terms and price. This may be adjusted based on revelations made during due diligence.
  7. Purchase Agreement and Other Contracts: A number of contracts will be drawn up to complete the sale. As these may be significant to the transaction, documents should be reviewed by a qualified M&A expert prior to signing.
  8. Deal Closure and Post-Merger Integration: The terms of what integration will look like should be established during the sale, prior to closing. Post-merger integration planning should include what will happen to current employees. After the deal is closed, you may have little communication from the seller. Do not lose the window of time available to smooth out any potential post-merger wrinkles before they happen.

Remember - parties to a merger are independent entities until the minute the deal is closed. The deal has the potential to fail for countless reasons outside of your control. Be very careful with sharing unnecessary information or access to your business early.

Steps on the Sell Side of an M&A

business acquisition

Valuation is a major consideration for sellers. On the seller side, an M&A transaction can be divided into three phases:

Phase One: Prepare Your Company for Sale

  • Establish Your Strategy As a Seller: Speak with the executive members of your company and establish your goals. If your company sells, what do you want the aftermath to look like for you? Is there a certain dollar amount you wish to sell the company for? Do you still wish to have a revenue income as a consultant on business operations?
  • Gather Your documents and materials: If you’re organized, this should be simple enough. Get information to share with potential buyers including financials, statements of income, and cash flows.
  • Consider Issues with Confidentiality: Confidentiality needs to be considered for every transaction, not just those involving intellectual property.

Phase Two: Locate a Buyer / Buyers

  • Communicate With Potential Buyers: As a seller, you can either be contacted by potential buyers, or you can contact them. It is always in your best interest if you have multiple interested parties.
  • Meet With Bidders: Learn more about the companies interested in acquiring your company and establishing synergies.
  • Review the LOI(s): Parties that wish to move forward will send you a letter of intent. This is a non-binding agreement but will include a proposed price, a description of the structure of the transaction, and terms. Review this document for any binding provisions, such as exclusivity, confidentiality, and allocation of expenses.

Phase Three: Negotiate and Finalize

  • Respond to bids: Review the bids for the best offer.
  • Draft a definitive agreement: Finalize terms of the sale.
  • Complete an Exclusivity Agreement: Promise the buyer that you won’t pursue negotiations with other buyers.
  • Complete the Due Diligence Process: Provide Information About the Scope of the Business: You can expedite the sales process by responding promptly to requests for information. Work with your attorney to ensure the information provided is accurate and organized.
  • Get final approval: If the buyer moves forward, get final approval from the board. Sign the deal, and it is done! From there, integration begins for the buyer.

How to Prepare for the Process of Merging and Acquiring Companies – Checklist

Any company considering a merger or acquisition should create and follow a checklist, similar to what is below. The topics covered include what to look for when acquiring or merging a company and also explain critical factors that companies should consider prior to entering into and closing a potential deal.

1. Examine Corporate Structures

acquisition of a company

An effective merger or acquisition involves examining the corporate structure of the buyer and the seller to determine the most appropriate method to merge or acquire the target company.

For example, in a transaction between an established corporation and a sole proprietorship startup, the corporation will likely be more interested in acquiring the sole proprietor than merging with it. In this situation, the corporation may have easier access to capital and goodwill, and the sole proprietor may access ideas or clientele in a different geographic area.

Another example may be when two separate corporations are involved in the transaction. In this case, the corporations may merge to create one entity, where the new corporation can benefit from the combined shareholders, goodwill, and clientele. Of course, an acquisition is also possible in this situation, but only through due diligence and examination of the best tax and legal structures will the companies know the best option for the transaction.

2. Make the Merger and Acquisition Transparent to Key Personnel

Various aspects of a merger or acquisition require confidentiality. However, in order to have a successful deal, key personnel must be kept informed about the deal and its process so that there can be a smooth transition when the merger or acquisition is complete. Once something is said, it cannot be undone. However, failure to inform key personnel of the merger or acquisition can result in the loss of key individuals, which can negatively impact the transaction or the success of the new company.

Transparency is essential, as issues with communications are one of the biggest reasons transactions fail. It can be difficult to keep every employee informed, especially in large organizations or when there is hesitancy to share information. Keep open communication among all parties, especially in the aftermath of a deal announcement.  Change can be very difficult for employees, especially unexpected changes which may arise in terms of personnel or management structure as a result of the deal.

3. Set Clear Goals

Companies participate in M&A transactions for a variety of reasons including diversification, acquisition of talent, and gaining operational efficiencies. Consider what you hope to gain from the acquisition and what your goals are. If you are buying, do you hope to acquire market segments, operating scale, patents, equipment, real estate, talent, new product offerings, cash flow, cost savings, clients/customers? The top motivations for selling are retirement and new opportunities.

Each party should independently create a clear set of goals that discusses what the desired outcome of the transaction will be and where the company believes that the highest value resides. Goals pertaining to expectations for how the company will proceed in the future post-merger or acquisition are the most important aspect of the transaction, but may at times be difficult to quantify. An experienced financial consultant may be able to help quantify your thoughts and create them into attainable goals.

4. Decide on the Leadership

Once the corporate structure of the deal and the process by which it will proceed is determined, it is important to decide how the leadership and management will be structured in the integrated company. This can be a challenging step because the leaders of each company typically desire to be in charge of the new company.

Whether the seller makes a clean break or stays active in some capacity is up for negotiation. Sometimes a business owner would like to stay on board in an employee or contractor role. If the purchaser wants the seller to continue to run the company for 12-24 months, but the seller wants to live on an island in the Bahamas, the ideal integration scenario may not work.  

Unless both parties to the transaction are already aligned on the leadership structure of the newly formed company, it will be necessary to have a conversation about who the leaders will be and what structure the leadership will take. This necessary conversation will save time and can ensure that the entire deal process runs smoothly. Please note that if the newly formed company is a corporation, it will be necessary to elect a board of directors in addition to the creation of a managerial team.

5. Compare Company Cultures

Company culture is a crucial factor to consider, even though it can be challenging to quantify. Most companies pride themselves on the atmosphere they create for their employees and clientele. However, these dynamics within the corporation, both social and political, can cause conflicts when the two companies attempt to merge or acquire another company.

To avoid this conflict, the companies should discuss what aspects of the cultures they will adopt and which elements they will leave behind when the merger or acquisition commences. By doing this step, new company culture can be created where all employees are comfortable moving forward.

6. Decide on the Branding

company acquisition process

A major part of the company culture is the company brand. Deciding on what the new company’s brand will be is an important procedure of merger and acquisition. The brand of the new company is important when defining both the company’s culture and its vision. This decision will include whether to retain the branding strategy of only one company or a combination of both strategies.

Importantly, the new company should be careful to include the ideas of the new leadership and be respectful of other aspects of each company’s culture. As with most aspects of mergers and acquisitions, the brand should be thoroughly discussed before the conclusion of the transaction.

7. Don’t Stop Ordering Inventory After Acquisition

If you are selling your company, continue to run your business as normal, including ordering inventory up until the day you no longer own the company. The new owner should be able to step in and run the company seamlessly. If you list inventory in your P&L statement, you will get the value.  

8. Secure Major Partnerships and Clients

Losing or potentially losing numerous clients, customers, and contracts as a result of a transaction will naturally make any buyer nervous. Communicate with your clients when appropriate. If their experience working with your company will be altered, in any way, let them know what to expect.

9. Know Your Company Narrative

A narrative is a verbal or written account of a series of events. When you sell a company, there will be questions from your clients, vendors, and competitors about the transaction. You will spend a significant amount of time in the early stages of a business acquisition transaction on the transaction valuation and due diligence - finish strong with a positive narrative. This is a necessary step internally for your employees, as well as externally for your clients, competitors, and the public.

10. Secure Alignment Among Key Stakeholders

During your business acquisition steps, you will have the opportunity to get buy-in from your stakeholders by verbalizing your support of the transaction. Being transparent can allow dialogue and conversations, and avoid potential disputes or even transaction derailments.

Experienced Lawyers at Sequoia Legal Can Help With Your M&A Deal

how to value a company for acquisition

When you hire a Colorado M&A attorney at Sequoia Legal, Our experienced corporate business attorneys can help you with all issues related to business acquisition, including:

  • Designating potential target companies.
  • Deciding how to value a company for acquisition.
  • Identifying potential issues which may be deal-breakers.
  • Conducting due diligence (legal, financial, operational, real estate, tax, environmental, etc.).
  • Negotiating (or re-negotiating) the terms of your deal.
  • Understanding the tax implications of the sale.
  • Obtaining regulatory or shareholder approval as needed.

Our M&A attorneys can help you navigate the steps for the merger and acquisition process, and ensure that the steps you take are not only legal but are cost and time-efficient. Whether you are preparing to buy or preparing to sell, contact us for a free consultation.

Conclusion

Mergers and acquisitions are highly technical, which is why it is imperative to hire merger professionals like those at Sequoia Legal. We have handled numerous mergers and acquisitions of varying sizes and have the expertise and connections to ensure that common mistakes are avoided and that the merger or acquisition is a success. Contact us today for a free consultation!

M&A Best Practices

M&A transactions are complicated transactions with a high failure rate (between 70 and 90%). Both sides of a transaction can take a gamble if they take shortcuts in any step of the transaction. Skipping due diligence or overlooking compliance can mean you are buying a problem - or a lot of problems.

For the Buy Side

While there are certain things that need to be done, such as reviewing performance and projections, buyers should think strategically. Along with following a checklist, the due diligence process should include an assessment of the upsides and downsides. Although it should seem like a “no-brainer” to go visit a company on-site, skipping this step is justified all too frequently.

For the Sell Side

Despite your significant experience running your company, you may have little preparation for your sale and the M&A process steps to navigate. Just like raising money, the best time to sell your company is when you don’t need to, and multiple parties are interested in acquiring it.  However, don’t enter acquisition talks if you are not prepared to part ways with your company.

Preparing for mergers and acquisitions is energy taxing and time-consuming, and mistakes made in valuation can impact the financial outcome for the seller. Having M&A lawyers representing you from the beginning of a transaction can ensure the process goes smoothly, you receive maximum value for the sale, and your legal interests are protected.

Andrew Lopez

Andrew is the founder and managing member of Sequoia Legal, LLC headquartered in Denver. He advises domestic and foreign companies and organizations, entrepreneurs and individuals on a variety of corporate and international regulatory and transactional matters

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