Mergers and acquisitions
Are you thinking of selling your business, or merging with one?
In the rapidly changing world of business, you may have come across a phrase called mergers and acquisitions (“M&A”). Industry experts often use this term to describe the process of combing one business with another. It can be a complex field to navigate if you do not have all the information on hand or the right people by your side to guide you through the process.
While the process of an M&A transaction can be exciting for both parties involved, and can provide many benefits – including adding value to the combined entity – it can also create a number of pitfalls if not managed well. In this article we would like to highlight some of the risks associated with any potential merger or acquisition, and what to look out for. In particular, the focus will be on four key risk areas that can be encountered during the process:
1.Consolidating two teams and cultures
During the consolidation, particular attention must be paid to combining teams. This can create many issues for management and impact the existing culture in the firm. Problems may arise with duplicating tasks or jobs, adjusting to technological incompatibility, unnecessary employees or equipment and poor management. This often results in confusion among new management regarding which staff to keep or which operations to uphold. It is imperative to have experienced advisers by your side to provide guidance how to manage this key risk area to turn it into a positive for your new firm.
2.Not completing the due diligence process diligently
No matter how carefully the buyer examines the seller entity, there will be items that are missed or simply not thought of during the due diligence process. While attention to examining financial statements, key contracts and customers should be priority, other items can pose greater risk later in the process. These can include previous violations of environmental policies, workers compensation history and security/data protection (i.e. credit card compliance and password access).
3.Not achieving profit targets after completion
Many directors are of the view that combining two $10m businesses would generate $20m in revenue each year from the start. However this is rarely the case when considering the fine tuning of key procedures and processes that must take place and staff having to adjusting to these. Or simply, initial targets set might have been too ambitious and must be scaled back. To mitigate this risk, it is best to examine the current market conditions to ensure there is enough demand for your product and budget for a slight decrease in revenue, or increase in costs, during the early familiarisation stages of the merger.
4.Creation of a financial burden for the combined entity
The last risk area to consider involves merging two entities with large debts. This can create a larger debt for the combined entity, which can impact future growth prospects by not being able to borrow funds necessary for future expansion. While the risk appetite differs between business owners, it is best to seek assistance from finance experts to reduce the risk of defaulting or future projects collapsing due to inadequate financing.
Be sure to keep us in mind for when the time comes to sell your business or merge with one. We can assist with everything from connecting you with the right people, preparing and guiding you through the due diligence process and engaging with external experts to provide you with the correct information necessary to successfully complete this transaction.
By Damir Turkanovic, Client Manager – Venture Private Advisory