Mergers and acquisitions are some of the most important and challenging aspects of owning and growing a business. Acquiring or merging companies requires a sophisticated approach, and it is important to develop a checklist to ensure that crucial steps are not overlooked. Each transaction is different, and the best method to use in any particular deal will vary based on a number of factors that each party should consider before merging or acquiring a company. These factors can include commercial considerations, legal and tax considerations, third party and corporate consents, and ideal process and timing.
What Is a Merger or Acquisition in Business?
The terms mergers and acquisition are commonly used interchangeably, but they have two different meanings. The technical definition of a corporate merger is usually two companies of approximately the same size joining forces to become one single entity. The best example of this is a deal when both CEOs agree that combining the companies is the best move for all parties involved. In contrast, an acquisition occurs when one company takes over or purchases the other company and establishes itself as the new owner. This can occur in a number of different ways.
What Are The Benefits of a Merger or Acquisition for Your Business?
The first question most business owners ask is why do companies merge? What is the benefit of an acquisition? The simple and short answer is that there are several benefits and reasons that companies may decide to enter into a merger or acquisition. Although they are different transactions, the benefits of a merger or acquisition are similar. Just a few benefits are:
- An increased market share and greater momentum in comparison to the competition.
- A reduction in competition on the market-leading to a reduction in operating costs;
- An opportunity to expand the company’s target market geographically; and
- Prevent the closing of a failing and/or unprofitable business.
The Process to Merging and Acquiring Companies – Checklist
Our first recommendation for a company considering a merger or acquisition is to 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. Analyze Finances
Prior to any formal agreements, a company should fully analyze the financials of the other company. Analyzing a company’s financials includes inspecting the other companies’ financial books and records for any red flags, this may include large amounts of debts or liabilities. This step is one of the essential keys to a successful merger.
This step can be done by the business owner without any outside guidance, but this is only recommended if the business owner has the experience and the accounting proficiency to catch the red flags mentioned above. If the business owner lacks the accounting proficiency to catch said red flags, it is wise to hire a qualified accountant or tax accountant. These professionals have the knowledge and experience to identify any major issues and shine a light on significant losses or gains that might be instrumental in deciding whether the deal progresses forward.
2. Calculate Costs
An integral part of analyzing the finances is to examine the other companies balance sheet as well as current and past income statements and statements of cash flows. This data can show whether the target company actually has the assets, cash flow, and income that they claim. Analyzing the past statements also allows the buyer to see if there are any red flags connected to the assets and whether the past decisions have negatively affected the health of the company.
3. Perform a Due Diligence Check on a Possible Merger or Acquisition Target
Another step which should occur prior to entering into formal agreements is a full due diligence check on the other company. This is essential because depending on the nature and type of merger or acquisition that the companies are entering into, the new company may inherit debilitating liabilities and debts. This may include tax debts, judgements, legal liabilities, and lien on real or personal property, which can cause severe and irreparable harm to the new company. By performing a full due diligence check early on, the liabilities can be discussed, and the companies can decide if and how they wish to proceed.
4. Examine Corporate Structures
An effective merger or acquisition also involves the crucial step of examining the corporate structure of the buyer and the seller to determine the best method to merge or acquire the target company.
For example, in a transaction between an established corporation and a sole proprietorship, the corporation may 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 have access to ideas or clientele in a different geographic area.
Another example may be in the situation where two corporations are involved in the transaction. In this case, the corporations may decide to merge together to create one entity, where the new corporation can benefit off of the combined shareholders, goodwill, and clientele. An acquisition is also a possibility in this situation, but only through due diligence and examination of the best tax and legal structures will the companies know what the best option for the transaction is.
5. Assess the Value of the Companies
In order to properly integrate two companies and allocate the shares proportionally post-merger, the two companies need to ascertain the value of each. Valuation methods vary, but it is best in these situations to hire an outside, third-party valuation expert to determine the value of each company. The valuation expert is experienced in all acceptable accounting valuation methods and can give a fair and accurate price of each company. This allows for the companies to properly price the shares of the new company in accordance with the companies’ values.
6. Make the Merger and Acquisition Transparent to Key Personnel
There are various aspects of a merger or acquisition which 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. It is important to be honest about any changes that may arise in terms of personnel or management structure as a result of the deal while simultaneously reassuring employees that no excessive changes will occur where possible. 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.
7. Set Clear Goals
Another essential step to consider in order to successfully merge or combine two companies is setting clear goals. 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. Some thoughts to have while creating these goals are the reasons the company entered into the transaction and what are the expectations for how the company will proceed in the future post-merger or acquisition. These goals 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.
8. 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 will be structured in the newly formed company. This can be a challenging step because the leaders of each company typically desire to be in charge of the new company. 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.
9. Compare Company Cultures
Company culture is an essential factor to consider, even though it can be challenging to quantify. Most companies pride themselves on the atmosphere that they create for their employees and clientele. 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 make sure to discuss what aspects of the cultures they will adopt and which aspects they will leave behind when either the merger or acquisition commences. By doing this step, new company culture can be created where all employees are comfortable moving forward.
10. Decide on the Branding
A key aspect of the company culture is the company brand. Deciding on what the new company’s brand will be is an important step for mergers and acquisitions. 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 prior to the conclusion of the transaction.
Merger and Acquisition Professionals Can Help You Merge Two Brands
Merger and acquisition professionals can offer a wealth of knowledge to the parties within a merger and acquisition. Therefore, it might be prudent to the success of the transaction to bring in expert assistance to help manage the deal. This may include an intermediary, who serves as a representative throughout the process and who helps to structure and negotiate the final merger or acquisition agreement. It is also important to gain legal representation, such as attorneys whose expertise is in mergers and acquisitions, to assist with due diligence and negotiations. The company’s legal representation can also assist in addressing issues that may arise through the course of the deal. These issues can include securities, tax, antitrust, and compliance law matters.
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!