Another key way to grow a business is through mergers and acquisition. However, this is often more difficult than it first appears. Companies will often debate to great lengths whether they should grow organically or should they merge. It’s a difficult question – does the company have the internal skillset or the ability to add key products or services, or is it better to acquire that skill through an acquisition. Then, if the company decides to acquire through an acquisition, what is the appropriate value for the acquisition. Far too often the buyers pay a much higher price than the target is worth. This is where Buy Side M&A Advisory comes in. How does a M&A specialist price a company so that the buyer gets a good value.
Why Do Buyer Due Diligence?
When a seller and buyer have entered into negotiations, a key step in the process is buyer due diligence. Why should the buyer do due diligence? Many reasons, but a key point is so that both the buyer and the seller can get a key understanding of the purchase. This includes a short term and a long term understanding of the purchase. Will the buyer make a profit right away or not. What about customers? Is the customer base stable or growing? Is there a need to get a new customer? Another understanding is benefits and liabilities. Does the buyer clearly understand the liabilities that exist. Overall due diligence is about evaluating the past, present and future, understanding the fit into the new company, the purpose in the new company and the risk associated. This is so much more than just looking at revenue growth or profit growth, but gaining a deep understanding of the purchase.
Who Should Be On The Due Diligence Team
The Due Diligence team should not be large, and this is a mistake often made. The key team members are the M&A advisor, legal, key business sponsor, and key company strategist. It is important to avoid over-indexing to a large number of analysts. Any additional support can be added as required externally. The key with the due diligence team is to have an efficient team, asking the right questions, and only spending 2-4 weeks doing an initial view of the proposal.
Key Parts of Due Diligence
There are many parts of due diligence, but a key component is the plan and scope. First the plan should be formal, devised by the core management team in conjunction with advisors. The plan should include what is the objective, roles and responsibilities, communication protocol (who talks to whom), and timeliness. Timeliness of communication is key. Red flag issues need to be highlighted quickly and resolved as fast as possible.
Scope is a key part that needs to be efficient and effective, and is probably the most important component of due diligence. The scope should only focus on key questions, big risks and post deal process. Key questions don’t really need to be explained, but what are the targets? Is the EBITDA 15% or 20%? In terms of risks, the buyer needs to understand what industries are affected, how does this affect profitability for both buyer and seller. Finally, post merger, a plan needs to be laid out for synergies, outside support, etc.
Mistakes
Key mistakes that are often made are centered around communication. As long as good communication with the client occurs on a timely basis. So for example, often buyers aggressively target certain companies, and are unwilling to look objectively at the analysis. ITs key to lay out the analysis clearly, concisely and insistently sometimes! Another mistake is in the transaction world. Financial sponsors are now across many asset classes, and it’s important to understand that the financier can be different than the buyer. Also pension funds or insurance companies can have their hands in these deals so it’s important to understand the funding. Another mistake is not sharing the objective clearly, and then if the objective changes for whatever reason how is the change handled? A final mistake is not understanding the risks. Risks can occur in many areas – regulatory, market conditions, political risk, etc. Its important to realize risks can be anywhere, and there needs to be a good clause to handle risks. At the end of the day, the mistakes all come down to communication. There is a significant human side to due diligence, and it cannot be overlooked.
Reporting in Due Diligence
I mentioned this earlier, but clear reporting is crucial. Reporting has three key main areas; First identify the business risk. Clearly lay out what will make this deal go, and what will make the deal not go. Second, physical visits. This isn’t just a paper exercise. It is important to physically visit manufacturing site, talk to employees, and develop a feel for what is being purchased. This is important to get a validation of the company. Finally close out all outstanding questions, sign agreement and end. It’s important to close this out in a timely manner.
Confidentiality
Just a final word on confidentiality. I think it goes without saying but confidentiality is paramount and is required from a buyer and a seller. First the seller, if not maintaining confidentiality will shop around the deal, and play off with their competitors. This could (and should) end the deal right there. The plan must have a, exclusivity clause. A mutual nondisclosure agreement is key. Then from the buyer side, they often have access to IP data, or other key seller advantages. Overall, the confidentiality agreement must be robust, have teeth and only include truly confidential information.
Maybury Partners, LLC 