Anatomy of a deal: advice on acquiring a company

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Deciding to merge with or acquire another company is a considerable and perhaps daunting decision for a family enterprise to enter into.

M&A can be a tool to help owners generate value, reposition their business and achieve growth.

Considerations include deciding on a target, what outside expertise might be needed, how to manage expectations and red flags that can pop up.

Here, three experts share tips on how to prepare, enter into and successfully conclude an acquisition.

Wojtek Baraniak, partner in the Mergers & Acquisitions and Private Equity and Private Client Services Groups, Fasken law firm

How does your role interact with family enterprises?

“I regularly provide counsel to private entrepreneurs and private family offices and enterprises (FEs) on governance issues, reorganizations, recapitalization transactions, dispositions, and acquisitions.

Anecdotally, deployment of capital in private investments (direct PE investing) by FEs is a growing part of asset allocations of FEs and my regular deal flow.”

What are some of the first things a family should discuss if they are considering acquiring a company for the first time?

“Consider your overall structure and your FE’s estate planning. An FE’s investment strategy needs to consider the bigger picture.

To address your FE’s specific needs, a skilled lawyer can work with FEs every step of the way to find appropriate solutions, create thoughtful strategies and establish clear goals for a family’s wealth and the continued success of the business for future generations.

Through proper estate planning, lawyers can assist in the orderly transfer of wealth to family members, the creation of a business succession plan and its transfer to family members, employees or other persons, or assist in executing philanthropic goals.

Investment holding structures also need to consider liability shielding and tax consideration as part of an FE’s larger strategy.”

Whom should a family business consider bringing onto their team in an acquisition scenario?

“Talk to your trusted legal advisor up front. In additional to documenting and closing a deal, a seasoned lawyer can help set a client’s expectations and mitigate against surprises during transactions. Your ideal legal counsel’s role includes explaining what to expect for acquisitions in terms of personnel and financial resource investment, obstacles, and stress points.

Consider what kind of outside advice your FE needs. Depending on the size of your FE, you might not have all the capacity or skill set required to bring an acquisition to a successful completion. Large FEs might have in-house accounting, tax, and legal resources that they can leverage for an acquisition, but this is not the case for FEs with small to medium-size operations where the burden falls on a few key individuals.

FEs will eventually need tax, accounting, and legal assistance for the due diligence, closing and integration phases of the transaction. Finding the right advisor can be a challenge but be sure to engage an advisor who routinely does acquisitions, has specific industry knowledge and experience and is someone that you feel that you can work with, even during difficult times. My most successful FE clients who are serial acquirers know when to engage and bring in the right outside advisor.

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Have a plan with controls. If an FE is new to direct investing, they have not considered creating an acquisition plan that sets out each stage of an investment (from sourcing to due diligence, to closing and integration). Having a plan lets you and the counterparty have realistic expectations on the time and resources required to get a deal done.

Sophisticated FEs with acquisition experience will establish internal controls and procedures for each stage of the plan. For example, an FE should establish controls that aim to identify legal liabilities of a target early on and prior to investing material amounts of time and money on due diligence.

If the target passes the initial evaluation, FEs can rely on trusted advisors to do a deep dive into the target, but there should be clear guidance and rules around materiality to avoid a transaction getting ‘stuck in the mud’ during due diligence.”

What are some things that families might overlook before embarking on their first acquisition?

“Interpersonal connections are key. I can’t stress enough the importance of face-to-face meetings and interpersonal connections. Most investments are also investments in people and existing management teams. In-person meetings help set the right tone and identify potential personality issues that legal and financial due diligence cannot necessarily uncover.

One area of particular concern is around reputational risks surrounding workplace conduct. Unsafe or toxic work environments might not be known or documented and can require personal meetings to identify.

FEs should be under no illusions: Some deals can take time. The growing complexities of tax, accounting and regulatory hurdles in the North American environment influence deal processes and structures and take time to resolve.”

Are there any red flags that a family enterprise should be aware of?

“Due Diligence: No business is perfect and without warts. A target’s success might be attributable to its rapid growth, but at the expense of a higher risk profile. That is why due diligence is a crucial stage of a transaction.

Material problems need to be identified, triaged and mitigated. Legal due diligence focuses on liabilities and claims that can flow from a target’s operations, human resources, contracts, environment issues and litigation. Identifying issues at the outset mitigates against post-closing surprises that can take considerable time and energy to resolve, interrupt integration and sideline a business.”

Can a deal be brought back from the brink of disaster? If so, what steps can the family take?

“Talk it out. I have had the opportunity to see a few deals come back from the brink through lengthy face-to-face meetings. There is something to be said about piling all the players in a transaction in a locked room and not letting anyone out until all issues are resolved. Experienced advisors can suggest creative solutions that meet their client’s goals and get a transaction closed.”

Sabrina Fitzgerald, National Private Client leader, PwC Canada

How does your role interact with family enterprises?

“I’m a CPA, CA and FEA (Family Enterprise advisor) working with both private clients and family enterprise clients helping to solve their most pressing issues. With family businesses, we are seeing a lot of demands in planning legacy, succession and wealth continuity planning.

I work with our clients who are in multigenerational wealth transfers, helping them assess current and future structures, the right governance needs for the family, as well as their overall ambition around purpose, values and impact investing.

As we are seeing the next generation get involved, there are more diversified investment structures within the family enterprise that they want to see.”

What are some of the first things a family should discuss if they are considering acquiring a company for the first time?

“What is the goal and purpose of this acquisition, and to have a family agreement around it. It is important to have clarity around the family legacy they are looking to achieve. Long-term goals should also be considered, such as what types of return they are looking for on this acquisition, and if it will be a short- or long-term hold.

What are the main criteria they are looking for: for instance, they should discuss industry, size, location and stage of development when looking at potential acquisitions.

Governance around the execution of the transaction should be considered. They should definitely discuss who will ultimately be responsible for this investment and how they want to participate in this investment. Who will take point on this work during and after?

They should also clarify if they will take on professional managers, or run the business themselves; should an M&A committee be formed? And how will they resolve conflict or stalemates should decisions become difficult?

It is always best to have the rules of the transaction set before the “transaction” starts.”

What are some things that families might overlook before embarking on their first acquisition?

“The target’s values and culture compared to the family’s values and culture. There needs to be a fit.

Be sure to provide information on your own family business, your culture, your views, the reasons behind wanting to have M&A discussions with this specific target, and be willing to share information about your company and family before asking information from the target. That will create an environment of trust that will facilitate and strongly help the following steps of the transaction.

Communication is a key success factor.

Whom should a family business consider bringing onto their team in an acquisition scenario?

Early in contemplation of the sale, the team should engage with a qualified and strong legal, deals and tax advisor who can help them with the entire transaction.

It is critical to have a team that can collaborate with one another and, most importantly, one that you trust.”

Are there any red flags that a family enterprise should be aware of to signal that a deal is going in the wrong direction?

“Any deal will be tough, and it will feel scary. However, those feelings are not reasons to believe the deal should be stopped. Seek advice from your advisors; they are not emotionally involved in the deal so they can help to alert you to actual red flags.”

What should acquiring entities think about in terms of the bigger picture?

“M&A can be a key tool to help owners reposition their businesses, bolster growth and achieve sustained outcomes in the current business environment. Private business owners should look for transformational deals that can help their company move ahead and quickly generate value. As mentioned in our 2023 Canadian M&A outlook, despite some headwinds, we believe there will be opportunities for savvy dealmakers in 2023 and beyond.”

Dale C. Tinkham, Managing Partner, Tinkham LLP

How does your role interact with family enterprises?

“I am an FCA, FCPA and CMC and am the Managing Partner of boutique CPA firm, providing business advisory, tax and assurance services to all types of family businesses.

Accountants provide business investment advice and perspective on potential transactions from the initial buy or sell decision all the way to the closing. We provide forward-looking tax planning, due diligence, financing, and general business advice throughout the transaction process.

Our role is one of trusted confidant and skilled advisor providing our professional advice on an hourly fee basis only, not commission, so our professional independence is never a concern. An accountant acts as a sounding board for the purchaser all the way through the acquisition process and can assist families contemplating a purchase or sale transaction by acting like a family CFO.”

What are some of the first things a family should discuss if they are considering acquiring a company for the first time?

“Families initially buy companies because of their passion for the venture and to utilize their unique skills, or for the cash flow from an investment they intend to build and subsequently sell. Some families have done well and seize the opportunities to expand by acquiring other ventures to build on their success.

To assist us in understanding our clients’ intentions, we want to know early in the engagement at least the following: Why do you want to acquire the company? What are your goals and objectives? How will the deal be financed? What are the risk factors and competitive forces with this business and the industry in which it operates? Will you have all the required resources to make this a successful venture, including financial expertise, human resources, marketing, operations? Are you willing to take on the risk that comes with being an entrepreneur? What resources are you prepared to risk being successful, capital, time, financial, relationships. Can you take any loss? Is the family supportive and prepared to make the necessary sacrifices of time, sweat equity, and capital?

Answers to these questions will be the foundation for any transaction.”

What are some things that families might overlook before embarking on their first acquisition?

“What are the social and financial impacts on the family after the transaction is completed? Who is defined to be family? Is the business a multigenerational operation or to be passed down eventually to the next generation, and to whom will it go if some of the beneficiaries are not working in the business? Will there be ‘have and have not’ members in the family and is there the need for even-handedness?

The family conflicts can be intense. Just look across the landscape of some well-known family-owned businesses to see the evidence of the relationship damage that can occur. The competing family interests, to the extent that they can be anticipated, will chart the path to a successful acquisition of a prosperous operation of a family business.”

Whom should a family business consider bringing onto their team in an acquisition scenario?

“A family business should bring in accountants as soon as possible to assess the prospects of financial viability, assist in risk identification and to provide guidance on developing an acquisition strategy.
Look for an accountant with an instinct for assessing the viability of the operations for long-term success and pricing the purchase transaction.

When a sound investment has been found, financial and legal advisors are necessary and should lead the due diligence examinations and developing a structure/agreement.
Tax advisors should also be brought in early to ensure the appropriate structure is used when acquiring a new business with careful consideration of the families existing structure and family succession planning.”

Are there any red flags that a family enterprise should be aware of to signal that a deal is going in the wrong direction?

“Lack of timely vendor disclosures, lack of clarity in vendor disclosures, and lack of a confidential information memorandum outlining key attributes of the business are all red flags.

The purchaser should assess the seller’s motivations early in the due diligence process. The accountant can perform the measurements and test the seller’s assertions to see if there should be a pause or halt in the purchase process.

Look at the numbers in detail. I recall one purchase transaction when, during accounting due diligence, I identified a corporate group buying a standard product at a slightly higher gross margin than other customers, and the vendor insisted that they had been good, long-time customers and always paid their accounts on time. The records supported this representation. However, something did not sit right with me. After further investigation, I determined that the corporate group was laundering money across the border. My client walked away. There is a wealth of information in the numbers when accounting due diligence is conducted properly.”

Can a deal be brought back from the brink of disaster? If so, what steps can the family take?

“A deal can be saved through renegotiation of price, terms, representations, warranties, earnouts, tax compensation strategies, and other compromises, but the essence of the transaction remains.

However, if there are reasons for a deal to get sidelined, those same reasons may persist after purchase. Don’t be afraid to walk away. Sometimes the best deal you make is the one you don’t make. Don’t get caught up in the thrill of the chase. And don’t let your sunk costs invested to date determine whether you should proceed to close a transaction that may not feel right. It may be less costly to walk away than to try and rescue a poor purchase transaction.”

Responses have been lightly edited for clarity and length.

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