Seven dos and don’ts in M&A deals

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Between 70 and 90 per cent of acquisitions fail, according to Harvard Business School. But it makes sense when you consider all the nuances and complexities that go into each and every M&A deal.

Here to outline the top 7 dos and don’ts when it comes to mergers and acquisitions are three experts working in the field: Michelle Alphonso, partner, national lead for Transaction Advisory Services and Private Equity at Grant Thornton LLP; Mark Borkowski, president of Mercantile Mergers & Acquisitions Corp.; and David Ford, FEA, business and M&A lawyer at Clark Wilson LLP.

1) Know your long-term value play

By ensuring you keep your eye on the long-term value of the transaction and its purpose, it will help with many aspects of the deal, explains Alphonso.

“There’s going to be volatility in markets around valuations, and what’s happening with margins, and there could be short-term fluctuations,” she explains. “If you fundamentally understand the long-term opportunity, and how you make good decisions to protect that long-term value, including a longer-term integration strategy, you’re going to end up in a good place.”

Alphonso also warns about business owners losing sight of shorter-term performance while the deal is being negotiated. Up to the point the deal is signed, all parties involved need to continue running their businesses.

“I think sometimes the momentum of the deal can take over [and] … buyers don’t pay attention to how fast the ball is moving, or where the profitability of the business and what the fundamentals of the business continue to look like as the deal negotiation is progressing,” she explains.

2) Network beyond brokers

In terms of building relationships with potential buyers and sellers or other players in industry that could help facilitate future M&A deals, Borkowski advises saying yes to any and all appropriate networking opportunities.

“Come on out. Reach out,” he says. “These people like to talk amongst themselves as well. Business owners like to meet not only with brokers, but would like to meet with other business owners…unfortunately, not only just family office owners, but business owners in general don’t seem to connect. But you have no idea how valuable it is.”

3) Get the right kind of experts involved

Having a strong relationship between the parties entering the deal will make things a lot smoother, but having a strong team surrounding the deal is critical, Alphonso says. If you don’t have it, you had better build it or find it elsewhere.

“You can build a team that has experience, but make sure you’re engaging an experienced deal professional because there’s a lot of complexity that people don’t necessarily think through when they’re moving through a merger and acquisition,” she explains. “It’s not as simple as buying a house. There is more complexity to that, including how the agreements get structured, how earnouts get structured, how holdbacks get structured, so definitely make sure you’ve got experienced deal makers around you.”

For Borkowski, relying on the non-M&A experts you have dealt with in past deals or your own instincts as a business owner, is not going to cut it in these circumstances.

“Owners don’t know any better; they trust their accountant, they trust their lawyer. Unless they reach out to a professional at KPMG, Ernst & Young, someone that does corporate finance or M&A, if you’re honestly contemplating raising money, even its debt, you’ve got to have a professional that does that,” he explains. “If you’re going to have a root canal done, you don’t go to a knee surgeon, you go to the specialist.”

4) Get the right details in a letter of intent (LOI) or term sheet

Ford cautions that if those involved in the deal are not giving careful thought to issues like the type of transaction and purchase price, and outlining it explicitly in a letter of intent, it will create a headache when it comes to drafting documents later on in the process.

For buyers, in particular, he advises a non-binding term sheet or LOI in order to give them the ability to adjust any of the details, but also to try and “nail down some intent upfront,” including earnouts or which executive staff will be staying on.

“We always say, ‘You’re either going to spend money up front or you’re going to spend money to figure out what the heck everybody meant later on,’” explains Ford.

5) Don’t forget cultural integration, as it can make or break a deal

This is a big one, as failure to integrate properly is among the most highly ranked causes for an M&A deal falling through and could be a result of many factors, including a failure to communicate with staff regarding intentions.

“So much of it is just about people and change in management and creating clear expectations and supporting the people who are actually the backbones of the organizations that are coming together,” says Ford. “A lot of this can be alleviated by planning and making sure everybody’s on the same page.”

For instance, ask: “How is HR thinking about things? What are the plans in terms of bringing people together and how much middle management is going to be kept on?”

“These are all important things,” he continues. “If you’re not thinking about it upfront, that’s a problem. If you’re not paying it enough attention overall then you’re increasing your likelihood of having a failed integration.”

6) Don’t skimp on the earnout details

Earnouts are a critical part of an M&A deal, but can easily cause issues if not developed or executed properly.

“I would say with earnouts, the main thing that’s going to define success and earnouts is alignment of how the earnout is actually going to be calculated and what are the variables that are going to be impacting whether or not a company meets its earnout threshold,” says Alphonso.

“It’s complex because there are so many variables,” says Ford. “How is it going to be measured and by whose standards? If we’re talking about EBITDA, using whose accounting standard? Was it the buyers pre, prior to, or the seller’s pre-acquisition or the buyer’s post, et cetera? Are we all aligned in terms of what is going to be measured and thought about? What are we going to include? What are we not going to include?”

7) Make sure everyone feels like a winner

Getting to a place where everyone feels like they are coming out on top, with real value, is a good objective when it comes to M&A.

“Buyers aren’t doing a favour to shareholders by buying, and shareholders aren’t doing a favour to the buyers for selling,” says Alphonso. “There’s going to be an equal amount of give and take but there are always going to be points of contention in a negotiation process. If you realize there is a bit of give and take, make sure you’re considering the other party’s perspective when you’re making key decisions.”

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