Successfully navigating a merger or acquisition is a monumental task that requires meticulous planning, strong strategization, and a firm grasp of relevant procedures.
A successful merger or acquisition can not only expand your company's capabilities but also significantly enhance shareholder value. However, managing the many complexities demands more than just a cursory knowledge of the steps involved.
To maximize the value of your initiative and avoid potential pitfalls, it’s advisable to seek qualified representation from a qualified Colorado mergers and acquisitions lawyer early in the process.
This comprehensive guide aims to deepen your understanding, offering insight into industry best practices and actionable advice to ensure that your merger or acquisition isn’t just successful but exemplary.
What Is the Mergers and Acquisitions Process?
Mergers and acquisitions (M&A) involve combining companies through various financial transactions, such as mergers, acquisitions, consolidations, or takeovers. It begins with strategic planning, followed by target identification, valuation, negotiation, due diligence, and finally, closing the deal.
This complex process aims to combine resources, streamline operations, expand market reach, or achieve other strategic objectives. M&A processes require careful analysis, legal considerations, and regulatory approval to ensure successful integration and minimize risks for all parties involved.
Important Terms to Understand in M&A
In order to understand the M&A process, it’s necessary first to learn a few key terms and concepts.
Merger vs. Acquisition
A common point of confusion is the difference between a merger and an acquisition. In a merger, two independent companies combine to form a new single entity. In an acquisition, one company purchases another and absorbs its assets and operations, and the target company ceases to exist as a separate legal entity.
Acquirer vs. Target
The acquirer is the company that buys another company; the target is the company being acquired.
Due Diligence
Due diligence is the comprehensive investigation and assessment of a target company's financial, legal, operational, and other aspects to evaluate risks and opportunities.
Valuation
Valuation is an assessment of the worth of a company’s operations and assets, usually through financial analysis and other methods.
Letter of Intent (LOI)
A letter of intent is a non-binding agreement outlining the basic terms of the deal, such as the proposed purchase price and key deal terms. It spells out the purpose of the transaction and helps move negotiations forward.
Definitive Agreement
The formal, legally binding contract that sets out the terms and conditions of the M&A transaction. It's like the final blueprint after all the architectural changes have been agreed upon.
Synergy
Synergy refers to the potential value or benefit of a merger or acquisition. Ideally, the combined entity will be more profitable and efficient than the two separate companies were before.
Antitrust Regulations
Antitrust regulations are laws aimed at promoting fair competition and preventing monopolistic practices. They can impact M&A transactions in numerous ways.
Integration
Integration is the process of combining the operations, systems, cultures, and personnel of the merged entities post-transaction.
Hostile Takeover
A hostile takeover is an undesired acquisition attempt that’s resisted by the target company's management, often leading to contentious negotiations or proxy battles.
Earnout
An earnout is a contractual provision where part of the purchase price is contingent on the target company achieving certain performance metrics after the acquisition.
The Timeline of the M&A Process
The mergers and acquisitions process should be a marathon, not a sprint.
The timeframe can vary depending on numerous factors, but it most often takes between one and six months, or in the case of some very large or complex transactions as long as several years. In some instances, there may be forceful opposition from advocacy groups, as demonstrated by Elon Musk's attempt to acquire Twitter in 2022.
Roles and Responsibilities in M&A
Both mergers and acquisitions involve two companies coming together — the acquirer and the target. However, the other personnel that take part in the action can differ greatly. Here’s a list of the principal parties involved in a private M&A transaction.
Owners
The owners of a company can be shareholders, members, or limited partners, depending on its structure. They’re the ultimate decision-makers who sign off on the deal. A board of directors or managers may also be involved to manage the deal and carry out the wishes of the owners or shareholders.
Chief Executive Officers (CEOs)
The CEO is in charge of the company’s day-to-day operations, as well as executing its strategic plan. They’re a key member of the leadership team.
Chief Financial Officers (CFOs)
A vital participant in any deal, the CFO is responsible for managing the financial aspects of the transaction, along with due diligence and post-merger or -acquisition integration.
External Consultants
Large transactions or deals with complicated integrations may require more industry consultants and external advisors. The need for additional assistance from outside parties usually hinges on the nature of the transaction and company leaders’ familiarity with the specific steps of a given acquisition process.
In addition to these major players, mergers and acquisitions frequently involve the participation of professionals like financial advisors, investment bankers, M&A attorneys, and corporate lawyers.
Considerations for Executing Mergers and Acquisitions
Successfully carrying out M&A deals isn’t always easy, and some factors will simply be out of your control. For instance, an acquisition that looks good on paper may not integrate well in actuality. Similarly, some companies that seem like suitable targets are just too expensive to acquire or operate.
Here are some critical considerations to address when planning an M&A deal.
Synergies
Whichever side of the deal you’re on, it’s wise to think about why the other party wants to pursue the deal and how the transaction will benefit them. Is the potential benefit greater for them or 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 might still incur significant debt or require substantial cash at closing.
Competing Bidders
Don't assume you’re the only entity interested in the target company. Jockeying with other bidders could drive up the price.
Market Conditions
Market positioning refers to the ability to influence the public's perception of a company in relation to its competitors. It’s a vital consideration when acquiring or merging with another entity.
The Health of the Target Company
How is the target company doing? Does it have pending or threatened litigation? Companies willing to take on the risks of imminent litigation may receive a significant discount.
Laws and Regulations
Would the transaction violate any laws or exclusivity agreements? The last thing you want is to end up in legal hot water because you got overzealous about an exciting opportunity.
What Are the Steps in the Mergers and Acquisitions Process?
M&A is a step-based procedure that can differ based on the nature, size, and complexity of the companies and the parties involved. This section details the typical steps involved in the mergers and acquisitions process.
Steps on the “Buy” Side
If you’re hoping to acquire another business, you’ll need to perform the following pivotal tasks.
Formulate Your Strategy
First and most crucially, consider what you're hoping to accomplish and what you need to do to get there. Figuring out your “why” will help motivate you and make subsequent steps more clear.
Identify and Contact Potential Target Companies
Next, develop detailed search criteria for the company or companies you want to acquire. Consider factors like industry, geographic location, cash flow and revenue, and intellectual property.
Exchange Initial Information
The exchange of information is vital to M&A, as the buyer needs to know what they're getting, and the seller wants to make sure its interests and confidential information are protected. All parties must avoid creating antitrust liability when exchanging competitively sensitive information.
Value the Company and Recognize Synergies
Valuation involves investigating, estimating, and documenting the worth and utility of the target company. The potential for enhanced profitability and efficiency that results from combining companies is known as synergy, examples of which include greater revenue, expanded access to supply chains, new equipment or vehicles, and a larger customer base.
If you lack experience with processes like evaluation and projection, seek the aid of a knowledgeable M&A lawyer or financial consultant.
Perform due Diligence
Following the initial exchange of information, you must investigate and verify the claims made by the seller.
For example, if a company’s leaders claim to have 5,000 paying clients, your team should corroborate this figure. Similarly, if a company owns patents or other intellectual property, you should make it a point to review and confirm their status.
Negotiate Offers
Before the deal can be made official, both parties must agree on the final terms and price. These may be amended based on the findings of your due diligence.
Draft the Purchase Agreement and Other Contracts
Various contracts must be drawn up to complete the sale. These agreements will be central to the transaction, so make sure you have an experienced M&A lawyer look them over before signing.
Discuss Post-Merger Integration
Before closing, you should develop concrete expectations regarding what integration will look like, including what will become of current employees. Once you’ve closed the deal, you may have little communication with the seller. Consequently, it’s important to smooth out any post-merger wrinkles as promptly as possible.
Remember, the parties to a merger are independent entities until the minute the transaction is finalized. A deal can fail for countless reasons outside of your control. Do your best to stay vigilant and organized, as obstacles can arise at any point.
Steps on the “Sell” Side
For the selling company, an M&A transaction can generally be divided into three phases: preparing the company for sale, finding a buyer, and finalizing the deal.
Establish Your Strategy as a Seller
Speak with the executive members of your company and come up with some concrete goals. What do you want the aftermath to look like for you? Is there a certain dollar amount you wish to sell for? Do you want to stay on and earn an income as an operations consultant? Once you’ve outlined your objectives, put them in writing.
Communicate with Potential Buyers
As a seller, you can either wait to be contacted by potential buyers or contact them yourself. It’s always a good idea to have multiple interested parties to give yourself more options.
Gather the Necessary Documents and Materials
This should be simple enough if you’re well-organized. Compile all information you may need to share with potential buyers, including financial statements, cash flows, and future projections.
Provide Information About Your Business
You can expedite the sales process by responding promptly to requests for information. Work with your attorney to ensure that the information you provide is complete and accurate.
Meet with Bidders
Sit down with the leaders of the companies interested in acquiring your company and establishing synergies. Doing so will give you a better idea of their goals, values, outlook, and management styles so you can make an informed decision.
Review the LOI(s)
Parties that wish to move forward will send you a letter of intent that will include a proposed price, a description of the structure of the transaction, and specific terms. Review this document carefully to look for any binding provisions, such as exclusivity, confidentiality, and allocation of expenses.
Respond to Bids
Review the bids you receive to identify and compare the best offers. Financially speaking, this is one of the most important aspects of the transaction, so take your time and be judicious.
Draft a Definitive Agreement
The definitive agreement is the contract that contains all of the agreed-upon terms and provisions for the deal. It finalizes the particulars of the sale and is legally binding.
Complete an Exclusivity Agreement
The purpose of an exclusivity agreement is to formally acknowledge to the buyer that you won't pursue negotiations with other buyers. This may be a clause in your definitive agreement, or it may be a separate contract.
Get Final Approval
If the buyer agrees to move forward, you’ll need to seek final approval from the board and/or other owners. All that’s left to do then is sign the deal to make it official. From there, the process of integration begins.
How to Prepare for Business Acquisitions in Colorado
Any company considering a merger or acquisition should create and follow a checklist of key objectives, procedures, and considerations. Here’s an overview of what to look for when acquiring or merging with another company, along with factors you should consider before closing a deal.
Consider Corporate Structures
An effective merger or acquisition strategy involves examining the corporate structure of both the buyer and the seller to determine the most appropriate method for subsuming the target company.
For example, an established corporation will likely be more interested in acquiring a sole proprietor startup than merging with it. In this situation, the corporation may have easier access to capital and goodwill, and the sole proprietor may gain resources or clientele in a different geographic area.
Another example is when two separate corporations are involved in the transaction. In this case, the corporations may merge to create a singular entity, with the new corporation benefitting from the combined shareholders, goodwill, and clientele.
Of course, an acquisition is also possible in the latter situation. However, only through due diligence and examination of the best tax and legal structures will the companies know the best way to approach the transaction.
Inform Key Personnel of the Merger or Acquisition
Various aspects of a merger or acquisition demand confidentiality. For the transaction to succeed, however, key personnel must be kept informed about the deal and its progress to ensure a smooth transition. Failure to keep these individuals in the loop can result in their loss, which could negatively impact the transaction or the new company’s prospects.
Transparency is essential, as communication issues are one of the main reasons transactions fail. That said, it can be difficult to keep every employee informed, especially in large organizations or when company leaders are hesitant to share information.
Prioritize open communication among all relevant parties, especially in the aftermath of a deal announcement. Keep in mind that change isn’t always easy, especially when it involves alterations to personnel or management structure.
Set Clear Goals and Expectations
Companies enter into M&A transactions for a variety of reasons, including diversification, acquisition of talent, and increased operational efficiency.
Think about what you hope to gain from your upcoming merger or acquisition. For example, if you’re buying, do you hope to capture new market segments, operating scale, patents, equipment, real estate, talent, product offerings, cash flow, profit margins, cost savings, and/or new clients or customers?
Each party should independently formulate a list of concrete goals that highlight the desired outcome of the transaction and where company leaders believe the highest value resides.
Those goals pertaining to expectations for how the company will proceed post-merger or acquisition are among the most important, but they can be hard to quantify. An experienced financial or legal consultant may be able to help transform your thoughts into attainable goals.
Decide on the New Leadership
Once you’ve outlined the terms of the deal and the process by which it will proceed, you’ll need 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 often want to remain in charge.
Whether the seller makes a clean break or stays active in some capacity is up for negotiation. Sometimes, a business owner may desire to stay on in an employee or contractor role. If the purchaser wants the seller to continue running the company for several months or years, but the seller wants to retire to an island in the Bahamas, the ideal integration scenario may not work.
Unless both parties are already in alignment regarding the leadership structure of the newly formed entity, you’ll need to have a frank conversation about what it may look like. This will save time and ensure that the deal runs smoothly.
It’s worth noting that if the newly formed company is a corporation, it will be necessary to elect a board of directors in addition to creating a managerial team.
Compare Company Cultures
Company culture is an integral yet frequently overlooked component of M&A. Most companies pride themselves on the environment they create for their employees and clientele. However, social and political dynamics within a corporation can cause conflicts when its leaders attempt to merge with or acquire another company.
To avoid such conflict, both organizations’ leaders should discuss which aspects of their respective company cultures they’ll adopt and which they’ll leave behind when the merger or acquisition commences. In this way, you can create a new company culture in which all employees are comfortable moving forward.
Work Out the Branding
Branding is one of the most important parts of any company. Deciding how the new entity will be branded will help define its vision, operations, and culture. This decision will include whether to retain the branding strategy of just one company or combine both strategies.
The new company’s leaders should be careful to implement the ideas of its managerial team and respect and uphold the elements of the blended company culture. As with most aspects of mergers and acquisitions, you should thoroughly discuss branding before finalizing the transaction.
Continue Ordering Inventory
If you’re selling your company, plan on continuing to run things as normal — including ordering inventory — up until the day you’re no longer in charge. The new owner should be able to step in and take the reins seamlessly and without any issues. If you list inventory in your P&L statement, you’ll get the value for it.
Secure Major Partnerships and Clients
The prospect of losing clients, customers, and contracts as a result of a merger or acquisition will naturally make any buyer nervous. Communicate with your clients when and as appropriate. If their experience with your company will change in any way, let them know what to expect.
Create Your Company Narrative
A company narrative is a verbal account of an organization’s background, vision, objectives, and industry contributions.
When you sell a company, your clients, vendors, and competitors will have questions about the transaction. In the early stages of the deal, you’ll spend a significant amount of time on valuation and due diligence. Constructing a positive narrative is how you finish strong.
Your company narrative will be instrumental internally in orienting your employees, as well as externally in presenting your new entity to clients, competitors, and the general public.
Seek the Approval of Your Stakeholders
During your merger or acquisition, you’ll have the opportunity to get buy-in from key stakeholders by expressing and explaining your support of the transaction. Being forthcoming and transparent can allow for constructive dialogue and help prevent potential disputes or derailments.
Checklist for the M&A Process in Colorado
Pre-Planning
- Conduct detailed market research to identify potential targets or interested buyers.
- Perform a thorough financial analysis and assess the strategic fit of potential M&A partners.
- Understand state-specific legal and regulatory considerations (state regulations, compliance issues, etc.).
- Assemble a skilled advisory team comprising lawyers, accountants, and M&A advisors familiar with Colorado's business landscape.
Handling the Transaction
- Preparation:
- Develop a clear strategy aligned with your business objectives.
- Prepare for due diligence by gathering financial records, legal documents, and accounts of business operations.
- Target Identification and Initial Approach:
- Identify and evaluate potential targets or merging partners.
- Make contact and express interest discreetly.
- Due Diligence:
- Conduct thorough due diligence focused on core financial, operational, and legal aspects.
- Pay special attention to Colorado-specific regulations, such as environmental and employment laws.
- Valuation and Financing:
- Determine the appropriate valuation method for the target company.
- Explore financing options within Colorado (e.g., local banks, investment firms).
- Negotiation and Deal Structuring:
- Negotiate the terms of the deal, considering both parties' objectives and regulatory compliance.
- Structure the deal to optimize tax implications and compliance with state laws.
- Closing and Integration:
- Finalize the transaction by taking all necessary legal and financial steps.
- Carry out a well-planned integration strategy, focusing on cultural and operational alignment.
Post-M&A Considerations
- Manage cultural integration to ensure a smooth transition and retain key talent.
- Ensure ongoing compliance with all state laws and regulations.
- Set up mechanisms to monitor the performance and success of the new entity.
Mergers and Acquisitions Best Practices
Mergers and acquisitions are complicated transactions with a high failure rate (between 70% and 90%, by some estimates). Both sides can put their interests at risk if they take shortcuts at any stage. Rushing due diligence or overlooking compliance may mean purchasing a problem — or a lot of problems.
With that in mind, here are some must-know best practices for approaching M&A.
For the Buyer
While you have no choice but to do certain things, such as reviewing past performance and projections, you should also think strategically. Along with the standard duties, your due diligence should include visiting the target company’s premises on-site and assessing all the possible upsides and downsides, including the intangibles.
Although this might seem like a no-brainer, steps like these are skipped all too frequently.
For the Seller
Despite your significant experience running your company, you may have little time to prepare for the sale and the steps required to navigate it. 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. That said, don't enter talks unless you’re ready to step down or part ways with your company.
Preparing for mergers and acquisitions can be exhausting and time-consuming, and mistakes can negatively impact the outcome. Regardless of which side of the transaction you’re on, having a team of M&A lawyers represent you from the outset can ensure that everything goes smoothly, you receive maximum value, and your legal rights and interests are protected.
Get Help with Your M&A Deal from the Experienced Lawyers at Sequoia Legal
The corporate business attorneys at Sequoia Legal can assist you with all tasks and duties related to business acquisition, including:
- Designating potential target companies
- Valuing companies for acquisition
- Identifying potential issues that may be deal-breakers
- Conducting due diligence (legal, financial, operational, real estate, 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 attorneys can guide you through the mergers and acquisitions process, ensuring that the steps you take are not only legally sound but also cost- and time-efficient. We’ve handled numerous mergers and acquisitions involving businesses of varying sizes and have the knowledge and connections to help your transaction go off without a hitch.
Whether you’re preparing to buy or sell, our skilled legal team can be an indispensable asset. Contact us today for a free consultation.
