There are many strategic reasons for companies to consider making an acquisition. A successful takeover can help companies achieve their strategic objectives, while also increase cost effectiveness within the business. Despite this, it's no easy task. The process of merging with another company or acquiring a company is extremely complex.
In addition to the legal side of things, companies must be aware of all the potential tax implications, while also negotiating good terms which benefit both parties involved. Because of this, companies tend to rely on lawyers and specialists to negotiate on their behalf in order to obtain the best possible deal. In addition to providing information regarding the possible options available, merger and acquisition specialists can provide forecasts highlighting the potential effects of changes to the company structure. While this helps company management teams decide which option is most suitable and whether to go ahead with any proposed changes the company structure, it also limits the amount of control a company has on the acquisition or merger.
However, the flexibility and complexity can really befuddle companies that have never entered into an M&A situation before. Many companies enter into an acquisition with only assumptions as to what should happen, letting specialists handle the rest. While using a specialist is undoubtedly a good idea to help the flow of your M&A, it's a good idea to get a handle on what exactly is happening, and to rid yourself of assumptions. Here are a few of the common misconceptions and what they mean for your company.
The Letter of Intent
This letter is a key document when undergoing a merger and acquisition. It defines to basic outline of the deal, and helps structure the foundation of the agreement. However, this does not mean that the Letter of Intent is where it ends. Rather, this is where the real work begins.
Due Diligence
Due diligence is an investigation or audit of a potential investment. It serves to confirm all material facts with regard to a sale. Perhaps the worst thing that can happen is being unprepared for due diligence. A buyer expects to gain access to the due diligence materials the moment the LOI is signed. Sellers, perhaps thinking the deal is done after the LOI is signed, often don’t share that same sense of urgency.
As such, if you are on the selling end of an M&A, make sure to plan well ahead. You should start compiling the due diligence materials the moment you start marketing the company. This way, the moment the LOI is signed, you can provide the Buyer access to the due diligence materials.
A high valuation needs a strong rationale
Avoid letting your own biased, sentimental opinion of your company’s worth get the better of you. Although you may have a compelling valuation, you will have to provide the Buyer with the rationale for that valuation and have the data to back it up. Buyers have to leap over financial hurdles in order to do deals. They don’t have unlimited piles of cash and aren’t looking to overspend when making acquisitions. Sellers need to provide Buyers with a distinct and well thought out rationale for a high valuation.
Do not underestimate the other side
Never take for granted your superiority over the other side; you’re bound to be unpleasantly surprised. Underestimating the other side’s sophistication and abilities is almost always a recipe for problems. It lets you be lulled into a false sense of security, while also showing your inexperience or naivety. Always take everything into stride, and be sure to make critical assessments on the other parties' skill and ability.
These are some common misconceptions and pitfalls that can really strangle your M&A attempts in their sleep. If you're able to make rational decisions, evaluate the other party and yourself critically, and use ample time to prepare, then these issues should not bother you at all.
By: Alexander Morrison