We have all heard the phrase that it takes a village. Usually, somebody will use that reference when there is a substantial task that will require a team effort to get it done right, or the right way. If you are about to start the journey through a merger or acquisition, you too will need a village.
Just as every village has their elders, their sheriffs, their architects and other specialized roles that everybody benefits from, you will need to assemble your group of specialists to help you achieve your goals.
While often referenced together, mergers and acquisitions are distinctly different transaction types. Whether you are the company doing the acquiring or the company getting acquired, there are a lot of legal and financial hoops to jump through while trying to ensure that both companies are getting the right deal done. A merger or acquisition (M&A) is a financial transaction that involves the consolidation of companies or assets.
Defining a merger:
In a merger, one company is absorbed by the other, and the absorbed company does not exist anymore, or two companies combine in a type of merger known as consolidation and form an entirely new entity.
The transaction generally requires the approval of both boards of directors and shareholders in each company. A merger is, generally speaking when two companies combine to either form a third company. Publicly traded companies will issue new shares under the new company as the old stocks get surrendered as part of the merger process.
Defining an acquisition:
In this case, one company purchases either equity or the assets of another entity, but neither company changes their name or their company structure. Both continue to exist, but the acquiring company owns the one acquired. An acquisition is a lot like a merger, except that instead of two companies forming a new one, one company buys another and absorbs them. The parent company’s name and stock do not change, and the target company usually ceases to exist. Sometimes it will continue as a shell, with no assets or cash, and will eventually either be liquidated or will change to an entirely different business area.
Regardless of whether the transaction is a merger or acquisition, this means a lot of due diligence and a village worth of work, including making sure your business is ready to sell and that it gets the maximum potential valuation possible.
Who’s in your village and what does each role entail? Here’s a guide to building your ideal M&A team.
The Village Architect: Your M&A Advisor
The M&A advisor can be anyone from an investment banker to a business broker, someone who usually specializes in small to medium-sized businesses. Your M&A advisor is often the most critical member of your team.
You can think of your M&A advisor as the village architect – the one who will keep all related projects aligned, scheduled, and on time. They are the one who will ultimately execute your buying or selling plan.
Typically you can expect a business broker to take between 3-7% as a success fee from a completed transaction. They coordinate and keep you updated on progress made at all the different levels of due diligence, legal and financial aspects of the M&A process.
The M&A advisor will free up your time so that you can continue to run your business until the closing date of the transaction. They will also keep your executive team and key stakeholders in the loop throughout the entire process.
As your M&A advisor will be so critical to the success of your transaction, it’s vital that they can quickly earn the trust and of the c-suite and critical stakeholders.
Although trust must be earned, you can accelerate the process by ensuring that your chosen advisor has specific industry experience with a good track record in other M&A transactions. Asking for testimonials and references from previous transactions will also help you validate your choice for this critical role.
The Village Chief Diplomat: The Investment Banker
There are times when an investment banker is also your M&A advisor, but even if you are using a business broker as you M&A advisor, an investment banker can be a great asset. They play two key roles: they use their knowledge of the market to help determine the value of the business (or the value of your own business if you are the acquiree) and they may offer scenarios on how that valuation might change or evolve. They can also advise and help navigate other variables that might impact the transition.
While the rest of your team focuses on the business, your investment banker has a more holistic view of your business and can help identify its real value in the context of similar companies. They can also help you defend against activist investors or even help you secure financing through selling shares or debt.
Having your business books in order before you hire an investment banker will help ensure that you will get the most out of their expertise which will help you get the best valuation for your business.
The Village Sheriff: Legal Counsel
For nearly any kind of significant financial transaction, you will need an attorney for legal counsel. Like the village sheriff who enforces law and order, your attorney will evaluate all the due diligence information while ensuring that how the deal is structured will not break any securities laws.
The most valuable attorneys will identify any potential deal-breaking components before the merger gets too far into the process.
An attorney can also be the voice of reason in a time when things can get heated, offering mediation and realistic advice. A seller might want too much for their business and dispute a valid valuation, and a buyer might get so enthused about the deal they miss cautionary details and potential risk or legal pitfalls.
For instance, if you are acquiring a business that has substantial debt, your legal counsel can ensure that you know about all of that debt, what you need to assume and what will remain the responsibility of the previous business owner. These are things that can significantly affect the value of a business and impact how the transaction is ultimately structured.
There are all kinds of legal issues that can impact an M&A deal, and in most cases getting an attorney involved early in the process is to your benefit.
The Village Deputy: Your Tax Attorney
Although your Sheriff may oversee the rule of law for your village, you often need some deputies who can walk the streets and get into the nitty-gritty. Adding a tax attorney to work with your legal counsel can pay huge dividends. Like the Village Deputy, they can get their hands dirty while supporting the overall transaction with their expertise.
A good tax attorney has experience and expertise working through IRS regulations which may impact how the transaction is ultimately structured.
They can help identify whether or not the transaction can be structured as a tax-free re-organization, understanding the tax implications and benefits from any net operating losses, and determining how to treat any capital gains.
Like your legal counsel, the sooner you can bring a tax attorney on your team, the better.
The Village Accountant: Financial Professionals
Like their legal counterparts, financial professionals work to validate transaction valuations by ensuring that financial statements fit into generally accepted accounting practice (GAAP).
Financial professionals on your team work with your tax attorneys to determine how decisions affect after-tax proceeds for shareholders and potential challenges with cross-border mergers.
Financial professionals may be members of your team already, or they may be someone you recruit specifically for this project. For instance, you may already have a tax accountant, but an auditor may be someone you need to employ for just this transaction. Your M&A advisor may have recommendations for you in this case.
The Village Mayor: You
Every village needs a mayor – somebody who has the ultimate responsibility and often has the most insight into how things work. As the owner or CEO of the business, your role in the M&A process is critical to the overall success.
You know your business better than anyone, and you are an industry expert in your own right. When it comes to selling the company, you are also facilitating inputs, direction, and feedback from your board members and members of your management team. You may also find yourself spending a lot of your time taking meetings with prospective buyers as you market the company and it’s potential value to an acquirer.
Although you play a vital role in any potential transaction, your primary job is to keep the business running smoothly while the deal moves through the process. Your customers still need to be served, your employees still need care and management, and your company must continue to operate as usual. The village you raise to facilitate the M&A process will allow you to balance your business and transaction responsibilities.
The Village Plumbers: Your I.T. team
Just as you need the village plumber to ensure that everything you don’t see doesn’t slow down the things you can see, your I.T. team has a critical role in any M&A transaction.
Your I.T. team will help set up & manage technology that has become standard in M&A transactions. For example, you’ll need to create a virtual data room (VDR) that will keep private or sensitive company data like earnings, finances, employee records, and customer data secure while ensuring that only those who need access to it have it.
Having this level of security is especially important with publicly held companies as data leaks can lead to accusations of insider trading or in the worst case scenario, it can even kill a deal.
Virtual data rooms (VDR) can minimize the need for travel back and forth, keep things more organized, and streamline the data review part of the due diligence process – resulting in cost savings. A VDR also helps companies keep a clear audit trail, showing who has examined what documents and when.
It takes a village to navigate the M&A process successfully. Although some resources can play multiple or overlapping roles throughout the process, it’s crucial that you have the right people in the right roles so that you can leverage their industry experience and expertise to ensure the transaction is a successful one.
Having the right team in place can be the difference between a successful transaction with minimum friction and a frustrating one that may even fail.