The best M&A dealmakers all have something in common…
They run a methodical process to drive a successful transaction. Here is an overview of how it all happens.
Mergers and Acquisitions (M&A) have long been a driving force in shaping the business landscape. These complex transactions involve a myriad of steps and stakeholders. In this in-depth exploration, we will unravel the M&A process, demystify the steps involved, and introduce you to the key players that make these deals happen.
Understanding the M&A Process
M&A transactions typically follow a structured process that can be summarized in a few key stages:
Stage 1 - Strategic Planning: The M&A journey begins with a strategic vision. Buyers should define their objectives and strategy to outline their investment criteria, the criteria by which they will evaluate whether an opportunity is a fit for their goals. The more exact your business criteria are, the easier it will be to source opportunities. For example, your investment criteria are to purchase family-owned plumbing companies generating over $1m in annual cash flow with little to no online presence.
Key players and their roles; Buyer: Provide strategic direction and set objectives for the M&A.
Timeline: 1 week to develop initial strategy, then consistently re-assess throughout the process.
Stage 2 - Sourcing: This stage involves scouting for potential acquisition targets. One channel is online marketplaces like BizBuySell, which tend to be competitive but are active in their selling process. By contrast, sourcing off-market deals can lead to a more buyer-friendly purchase price, but brings other challenges such as having no selling broker to assist the seller through the process. Regardless of your sourcing approach, extensive market research, networking, and strong analyses are vital.
Key Players and their roles; Buyer: Lead the search for potential targets or partners based on strategic goals. Investment Bankers: Help identify suitable acquisition targets and facilitate introductions.
Stage 3 - Valuation: This stage is dependent on strategy, but many buyers opt to receive a professional valuation from a CPA firm like Petracca Group to ensure the purchase price is market. This process can be done through several methodologies but always includes a detailed evaluation of a Company’s market, financials, comparable companies, and future earning potential. Other buyers may skip this stage instead of opting to value a business based on a quick multiple of EBITDA / SDE approach.
Key players and their roles; Valuation Specialists: Determine the financial worth of the target company through valuation analysis.
Timeline: 2 weeks
Stage 4 - Negotiation: Buyer and seller negotiate the potential deal's terms, typically in the form of a Letter of Intent (LOI) or Indication of Interest (IOI) which is mostly non-binding except for exclusivity provisions. An LOI is typically more detailed than an LOI, but both include the purchase price, payment structure, and other crucial factors. Of note, many of these terms can be adjusted and re-negotiated in the remaining stages, but detailing a key framework with as much agreement upfront is essential for ensuring a smooth process of Purchase Agreement.
Key players and their roles; Buyer: Oversee the negotiation process and make strategic decisions. Legal Team: Draft and review the legal aspects of the negotiation, such as purchase agreements.
Timeline: 1-3 weeks
Stage 5 - Capital Sourcing: Once the framework of a deal is agreed to, capital sourcing is necessary to fund the acquisition, cover due diligence and integration costs, provide negotiation leverage, and mitigate risks.
Key players and their roles; Buyer: Receive deal financing structure options.
Timeline: 4-12 weeks (should be done at the same time as due diligence)
Stage 6 - Due Diligence: Once an offer is accepted, the buyer will engage in a comprehensive examination of the target company’s documents to verify their expectations and determine if there are any “red flags,” or issues that would materially alter their opinion of the negotiated deal. Diligence should always include financial (including Quality of Earnings), legal, and operational due diligence. Other potentially valuable due diligence areas can include tax, real estate, technical, and HR due diligence. In every case, do not try to be penny-wise and pound-foolish by trying to do your own due diligence, hire a firm specializing in these areas that sees a dozen plus transactions per year and has the specialized expertise to identify pitfalls. Ideally, your diligence provider should also act as a strategic advisor who can explain their findings and their impact on your deal. Note that most expenses of a deal will begin to accrue during this phase as well as the next few following.
Key players and their roles; Due Diligence Consultants: Investigate the financial, operational, legal, and other aspects of the Company to identify any potential issues. Seller: Provides access to their documents.
Timeline: 4-12 weeks (should be done at the same time as capital sourcing)
Stage 7 - Purchase Agreement Drafting: After the initial negotiation, the full legal documents for the transaction are drafted and revised through legal counsel. These documents outline the terms, conditions, and responsibilities of each party. This stage is one of the more contentious pieces of the deal cycle.
Key players and their roles; Legal Team: Draft the legal documents that formalize the terms and conditions of the deal.
Timeline: 4 weeks (can be done at the same time as due diligence)
Stage 8 - Contracts, Licenses, and Regulatory Approvals: Many M&A deals are conditional on the successful execution or transfer of agreements. Certain loans may be required to switch guarantor parties. Certain key employee agreements may be required. Certain licenses may need to be transferred to new entities.
Key players and their roles; Legal Team: Assist in negotiating necessary agreements for the new structure Regulatory and Compliance Experts: Handle the necessary regulatory approvals and ensure compliance with applicable laws.
Timeline: 6 weeks (can be done at the same time as due diligence)
Stage 9 - Closing: Congratulations! This is the stage at which pen meets paper and the business officially transfers to new ownership.
Key players and their roles; Legal Team: Execute SPA
Timeline: 1 day
Stage 10 - Integration: Once the deal is officially closed, the new owner(s) work to incorporate any changes in the operations of the new business. This stage is especially important in a merger or a platform tuck-in and should have its own in-depth planning and deadlines. Culture can never be overlooked, and while implementations must be dynamic, changing an ecosystem too quickly may also cause issues. During this phase, the best practice is to work with the sprint methodology to constantly reevaluate priorities and monitor progress.
Key players and their roles; Implementation Project manager: Keep key parties accountable for meeting deadlines HR Team: Integrate people and culture Buyer: Provide guidance and support during the integration phase.
Timeline: Multiple 4-week splint blocks
It's important to note that the timelines are general estimates, and the actual duration for each stage can be longer or shorter depending on specific circumstances. Additionally, some stages overlap, and there should be concurrent activities in an M&A process to expedite the overall timeline. Effective project management and a clear understanding of the goals and objectives are crucial for meeting M&A timelines. Additionally, momentum is essential in getting a deal completed. Understanding the intricacies of the M&A process and the roles of various key players is essential for companies looking to engage in these transformative transactions. With careful planning, due diligence, and execution, M&A can be a strategic tool for achieving business growth and success.
Please reach out to our firm, Petracca Group for assistance in your M&A process. We are experts in the financial intricacies of deals and would love to become a key partner in your successful transaction.