Mergers and Acquisitions
Make sure you know what you’re really buying
Growing your business has taken blood, sweat, and many sleepless nights. You’re now at the point where taking your business to the next level – in the timeframe you have set – can only be achieved through acquiring or merging with another business.
There are several opportunities available – so how do you decide which direction to take? While merger and acquisition (M&A) transactions can lead to huge growth opportunities, they also have substantial risks for both businesses.
So, how can you identify potential M&A risks and mitigate them to ensure your business M&A is successful?
Here are five major risk areas to watch out for during a merger and acquisition transaction.
Overpayment is a common mistake in M&A situations. The excitement of business expansion, pressure imposed by vendors or financial period deadlines create an impetus to push the transaction through rather than work out an arrangement that creates or retains the most value.
Start by reviewing the business’ financial statements, and work with an independent business advisor to interrogate the numbers to understand the business’ value drivers and potential pitfalls.
Watch out for liabilities that may not yet be reflected in the balance sheet, such as pending legal or insurance claims, employee obligations including leave and bonus accruals, or outstanding tax audits.
Legal & Regulatory Risk
Review the business’ contracts with customers, suppliers, partners, financiers, landlords, and insurers, and the regulatory environment/s for both businesses.
The business’ value can be significantly eroded by the loss of a major client, or the withdrawal of supply of a crucial input, so ensure these contracts are watertight and not voidable on change of business director/ owner.
Contracts with financiers and insurers will assist in identifying potential issues that may not be specified in financial statements, and insurance claim records will assist in understanding claims history and value of claims paid. The value derived from consolidating workforces into fewer premises can be undermined if leases on premises cannot be quickly or easily terminated.
Changes in the business’ regulatory environment could erode any value created through the M&A, or prevent the completion of the transaction.
People and Culture Risk
Thoroughly review the employment contracts and any Agreements/ Awards that apply to the business, including consultation requirements with employees and/or unions.
Document known key person or intellectual property (IP) risks and whether any director or employees are to be retained for a period. Identify contractual commitments for payment of bonuses, leave or termination payments during and following the M&A.
Less easily identifiable is the business culture and leadership style of the business. Confidentiality obligations may rule out discreet enquiries within the industry, however the business may have records of employee absenteeism, turnover and surveys available, while social media such as LinkedIn will also reveal current and former employees’ views.
IT and Cyber Risk
IT and cyber risk is a growing yet under-estimated threat to M&As. IT is such a crucial component of modern business, both operationally and in relation to the flow of information used to make vital decisions. A mismatch in systems can require a substantial amount of effort and take an excruciatingly long time to correct. Management can grow old very quickly when they can’t get the single source of truth required to take decisions with confidence.
Meanwhile, cyber threats have the potential to be that ‘black swan’ event risk management experts have nightmares about. Even if you can recover your data the reputation damage done by a breach of security can be enormous and lead to customers deciding not to do business with you ever again.
IT specialists can assist businesses to identify IT synergies and cyber-security threats and that’s why they are an important part of the modern M&A process.
This is one of the most underestimated risks of an M&A transaction. Significant integration issues can arise following a M&A, both operational and cultural. Consolidating operational processes, workforces and premises takes time and diligent planning.
Identifying synergies prior to the M&A and developing a plan for operational and organisational change is crucial to integrating the businesses. If integration is delayed or poorly planned, the businesses may continue to function separately, increasing costs or at least deferring the realisation of assumed savings and thereby decreasing the value of the business.
Want to know more about Mergers and Acquisitions?
The BridgePoint Group team has assisted many businesses to quantify the benefits and risks of a M&A transaction, and structure deals to protect our clients.
We ensure confidentiality and due diligence processes are put in place to protect you and your business, and work with you to document potential risks and structure plans to mitigate these to ensure your business maximises the value of a M&A.
If you’re thinking of acquiring or merging with another business to continue your business growth, reach out to the BridgePoint Group team for a confidential chat so you can minimise your risks and maximise your value. You can reach us on 1300 656 141 or email us firstname.lastname@example.org
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