Prepare for Merger & Acquisition: Things To Check
Jan 12, 2023
Getting ready to sell your business can be challenging and time-consuming. Successful merger and acquisition ("M&A") deals necessitate in-depth planning, knowledgeable consultants, a committed management team, and knowledge of the critical commercial, financial, and legal concerns involved.
The private company placing itself for sale should perform the following preliminary actions before the official start of an M&A process. Let's dive in!
Preparing an Overview
An "Overview," also known as an "Executive Summary" deck, is routinely prepared by selling companies. The purpose of this deck, which usually consists of 15 to 20 slides in a PowerPoint presentation, is to introduce potential customers to the company's goods, technology, staff, financials, market opportunity, and more.
Some quick tips:
Limit the number of slides to a maximum of 20
Avoid wordy sentences
Keep the financial details precise
Save the in-depth story for an in-person presentation
Avoid using too much jargon or acronyms that the recipient may not immediately understand
Keep an eye on the competition
Make sure the data is up to date
Keep the presentation clean. Avoid using too many colors and stick to a standard font, and text color and size
Share the presentation in an easy-to-access PDF format
Tell a compelling, memorable, and exciting story to convince the viewer of why the market opportunity is large
The selling company might think about creating specialty decks, such as a Product and Tech deck, a Financial deck, and a People deck, for more in-depth presentations to buyers in addition to the "Overview" or "Executive Summary" deck. These presentations are often utilized when a customer expresses an initial interest after the first one and requests further information.
Get Ready For The Buyer To Conduct Extensive Due Diligence
The buyer performs much due diligence in merger and acquisition negotiations. They will want to make sure to be aware of everything before committing to the transaction, including what they are buying, the obligations they are taking on, the nature and scope of the selling company's contingent liabilities, problematic contracts, litigation risks, intellectual property issues, and a host of other things. In private firm acquisitions, where the selling company has not been subject to the scrutiny of the public markets, this buyer focus is particularly true.
Recent mergers and acquisitions activity and legal proceedings have highlighted the need for a buyer to perform thorough due diligence regarding potential risks, particularly looking into financial statements, data breaches, data privacy and cybersecurity issues, intellectual property issues, regulatory risks (such as antitrust and CFIUS issues), and potential employment law and sexual harassment liability.
The buyer's due diligence will heavily tax the time and resources of the selling company's management. Finding the right balance between company priorities and fulfilling the buyer's due diligence needs is crucial because management is often lean and already giving the underlying business its entire time and attention. The M&A advisors (financial and legal) for the selling firm can advise management on creating the appropriate work streams, what to anticipate from the buyer's due diligence procedure, and how to best respond to diligence demands.
The selling company will be better equipped to respond to inquiries, negotiate mitigation measures if necessary, and complete a sale of the company by carefully planning for the buyer's due diligence activities, effectively managing resources dedicated to the diligence process, and correctly anticipating the related issues that may arise and risks that the buyer may identify.
Disclosure schedules are an integral part of any M&A transaction. An accurate disclosure schedule could result in a breach of the acquisition agreement. Well-drafted disclosure schedules provide substantial protection against post-closing allegations that the seller breached its representations and warranties.
A selling company often needs to correct several things in preparing disclosure schedules:
The list of material contracts needs to be completed or updated.
Information about patents, trademarks, service marks, domain names, etc., needs to be completed and/or needs more detail on the software used in the business.
Disclosure schedules should be compiled early in the M&A process and carefully and thoroughly.
There are incomplete financial statements or liability disclosures.
One or more disclosure schedules omit critical "exceptions" to make the related representations and warranties in the acquisition agreement accurate and complete. Disclosure schedules prepared at the end of the M&A process likely need to be completed or improved. The seller should immediately receive the first draft of the acquisition agreement. The selling company can provide a template of typical representations and a "skeletal" outline of the disclosure schedules.
Examine The Seller's Financial Projections And Statements
The selling company should be prepared to provide audited financial statements. Early-stage private companies frequently wish to avoid incurring audit costs. Buyers will be concerned with the seller's historical financial statements and projections of its future performance. The buyer wants to be comfortable that the financial statements were prepared following GAAP. The seller should consider engaging a consultant to perform a quality of earnings report (QER). A QER can alert the seller to potential business and financial issues. It also helps confirm bidders' due diligence review conclusions concerning the seller's business, financial performance, and condition.
Plan How To Attract Several Bidders To The Table To Assist The Seller In Obtaining The Best Deal
When there are several possible bids, sellers frequently get the most incredible bargains. Sellers can frequently get a higher price, better contract terms, or both by taking advantage of the competitive environment or creating the illusion of one. Negotiating with just one bidder (especially when that bidder is aware that it is the only potential buyer) can significantly disadvantage the selling company, especially if it accepts an exclusivity ("no shop") agreement early on in the process that prevents it from speaking with other prospective buyers for a certain amount of time. If and when exclusivity is finally granted, it should ideally be coupled with a final price increase or other improvements to the contract terms from the seller's perspective.
The use of an auction or competitive bidding is frequently advised for sellers to reduce the possibility that a bidder's demand for exclusivity may hem them in. With several bidders, each bidder can compete with the others to reach a fair agreement. The notion is that numerous interested parties can aid in negotiations even if there is only one serious potential buyer.
Create a Solid M&A NDA Form
Confidential and proprietary information often needs to be shared by the selling company with prospective bidders. Therefore, NDAs should contain several essential provisions which protect the seller. "Standard" business NDAs usually omit significant terms common in M&A NDAs. Selling companies should refrain from the mutual form if they are not planning to receive confidential information from the buyer. A one-way NDA is geared towards protecting the seller (as the disclosing party). Buyers may seek to reduce their obligations as much as possible in the NDA negotiation.
M&A counsel can help the seller identify what likely matters the most to the seller and the serial buyer. This enables the parties to reach an agreement on the NDA without damaging the relationship between the sellers and the buyer. One final piece of advice here: sophisticated serial buyers typically prefer to use their form of NDA.
Get Your M&A Negotiating Team Together
You want an M&A team that is experienced, expert, ready, and aligned on negotiation strategy. This means getting approval from the company's Board of Directors to proceed with a specified M&A process. The selection of experienced legal counsel and accountants will also be necessary here.
The CEO is primarily responsible for selling the vision for the business and clearly articulating why the selling company is attractive. In addition, the CEO must understand the fundamental legal and business issues that will arise and be able to make many judgment calls on those issues. Ultimately, a successful sale of the company depends upon the degree of the CEO's involvement and commitment to the M&A process.
In an M&A deal, the CEO is often challenged because they are negotiating with a future employer and don't want to be perceived as complex. This problem is exacerbated if the buyer is a private equity sponsor offering the CEO and other members of management a piece of the post-closing equity. As a result, the CEO may need to act as a facilitator to get the deal done despite the conflict of interest they might face.
Build a Great M&A Legal Team
M&A transactions involve complex, multifaceted agreements, and deal structures. They are typically fast-moving and can be contentious if not appropriately managed. Therefore, it is critically important for a successful M&A process that the seller hire outside counsel. Only a specialist can bring the experience and expertise that a seller will need to negotiate the best outcome.
You don't want legal counsel that only points out problems without potential solutions or lacks the expertise to identify and mitigate critical issues in the first place. Each specialist should be steeped in M&A legal considerations relevant to the deal and practice their specialty full-time. Sellers should expect that a sophisticated buyer will engage a full range of legal experts on an equally experienced bench of specialists.
Consider hiring an M&A financial advisor or investment banker who can bring significant value to the transaction on the seller's behalf. Some investors in privately held startups might question the cost-benefit aspect of engaging such an advisor. However, such an advisor can provide a range of assistance, including negotiating price negotiations and other key deal terms.
Creating an Online Data Room
Selling firms should create an online data room to efficiently manage the due diligence process. Essential documents from the selling company can be stored in an online repository. Most online data rooms also include features that allow sellers to see which representatives of the buyer were in the online space. Selling businesses need to know that filling an online data room will take time and commitment from valuable corporate resources. M&A counsel can offer the selling business a comprehensive list of the data and files prospective purchasers should expect to see.
A company's online data room should typically only be accessible with two-factor authentication. In addition, certain documents printed from the room should have a watermark that identifies the person or business that placed the order. Finally, restrictions may be beneficial to limit access to certain documents by some users.
Another aspect of taking the digital route is using a SaaS-based or Cloud-based platform to manage your entities, contracts, and amendments. You can maintain all the records under one hood for easy access to the authorized party, and when the M&A is ongoing, it is convenient for your team to transfer all the required data, that too, with ease, quickness, and accuracy. Traact can be your one-stop solution for this purpose.
With Traact, you can reduce the time your legal team spends manually managing crucial documents, and it is a quick resolution to onboard all your entities. On top of it, you can save a lot of funds that you would generally spend on data transfer and services. In short, Traact can save you time and money and ease your team's workload with an array of automation.
Preparing for an M&A or going for an IPO is a complex process. However, with a bit of legal help, your legal operations can be simplified. Traact can help streamline redundant tasks and add to your team's valuable time. Everything can be done in one place, from data entry to entity management. In addition, we can help automate numerous tasks that are inconsequential in nature and consume your resources. To understand more about what Traact can do for you, book a free demo.