M&A 101: 5 key things many business leaders don’t know

Merging with or acquiring another business can be one of the most challenging moments a company can face. The critical thing is that both sides are clear on why they are buying or selling and what the plan moving forward is, says Jeannette Linfoot

Mergers and acquisitions (M&As) are essential in the corporate world, as companies buy and sell each other to expand their businesses and increase profitability.

A ‘merger’ is the coming together of two or more businesses to create a larger version of the original business, while an ‘acquisition’ is the transfer of ownership of one business to another.

Since hitting its lowest point in the first quarter of 2023, global M&A activity is showing signs of revival. However, M&As are among the most complex business activities an organisation will undertake and come with complex risks, which is why it is so crucial to fully understand how they work.

To help demystify the process, here are five key things many business owners don’t know about M&As.

#1 – Understanding the reason for doing the deal and the importance of negotiation is key

The most important thing to be clear on when it comes to a merger or acquisition is the rationale for doing a deal in the first place, and each side needs to be clear on why they are buying or selling respectively.

Often, too much attention is put on getting the deal itself over the line, and not enough importance is placed upon post-deal implementation and how it fits into a company’s strategic growth plans.

All M&A negotiations require a number of compromises, and understanding negotiation is vital, whether you are the buyer or the seller.

There are multiple ways to value a business, but ultimately a business is worth what someone is prepared to pay for it.

After producing several valuation models of the target company, the buyer should have enough information to be able to construct a reasonable offer. Once this offer has been presented, the two companies can negotiate terms in more detail.

It is critical to understand where leverage sits in the negotiations. Who wants the deal more — the buyer or the seller? Are there multiple bidders that can be played against one another? Are there other factors at hand that could influence the deal?

It is important that the M&A team establishes a rapport with the lead negotiators on the other side, and it is never helpful to let negotiations get heated or antagonistic. In any negotiation both sides should be aiming for a win-win rather than a win-lose situation.

#2 – The process can take time

Most mergers and acquisitions can take a long period of time. From coming to market, to negotiation, to close; a period of four to six months is not uncommon, and for larger, global or more complex transactions it can take significantly longer.

The time frame will depend on the urgency of the buyer to perform due diligence and complete the transaction, and whether the selling company is able to run a competitive process to sell the company, generating interest from multiple bidders.

To try and speed up the process, make sure you start your preparations early.

#3 – Due diligence is everything

Due diligence is critical to preparing for M&A transactions and shouldn’t be underestimated

Evidence points to a 50 per cent failure rate for M&A deals, so clearly every effort must be made to get the facts right – including the legal and financial aspects typically covered by intensive due diligence.

Before committing to the transaction, the buyer must ensure they know what they are buying and which obligations they are assuming. They also need to understand the nature and extent of the selling company’s contingent liabilities, problematic contracts, litigation risk, intellectual property issues, and much more.

Often, one of the most neglected sides of due diligence is HR. All businesses are reliant on their people to deliver results, but a common problem often seen in M&A deals is less attention being paid to executive board performance, leadership succession and team development both pre and post-deal.

#4 – It takes a ‘people first’ approach

The merging of two teams can be difficult, so the focus must go beyond employee contracts. Adopting a people-first approach is vital for both the acquirer and the seller to achieve cultural cohesion for new and acquired team members.

As the buyer, it is critical to ensure the new top team agree on the operating model, cultural priorities, and integration architecture.

As companies often can’t announce these changes early in the merger-planning effort, an effective, proactive communication plan is critical to ensure employees understand the process and the timeline until the company can reveal the decisions it has made.

A strong communications strategy and plan promotes business continuity by ensuring the right messages are communicated and reinforced to minimise the anxiety of employees, boost morale, and retain talent.

It’s important for both acquirers and sellers to manage the expectations of employees and handle any changes or redundancies with the appropriate care and sensitivity.

#5 – Have good team support

These transactions are incredibly complex, and it is easy for some issues to fall through the cracks.

Therefore, businesses must ensure they have a trusted M&A legal team and corporate finance team who are experts in appropriate specialty areas (such as tax, compensation and benefits, employee matters, real estate, intellectual property, cybersecurity, data privacy, antitrust, and international trade).

To be effective, an M&A lawyer must be intimately familiar with both the business realities of M&A deals and the overall structure and inner workings of the acquisition agreement.

It is often hugely helpful to have an independent industry expert as an advisor on the deal, who can give a ‘real’ perspective on the business, potential risks and opportunities in the business plan, as well as provide a benchmark of best practice in that particular sector.

Final words

Merging with or acquiring another business can be one of the most challenging moments a company can face. The most critical thing is that both sides of the deal are clear on why they are buying or selling the business and what the plan is moving forwards.

With enough planning, investigation and communication, business owners can have a successful merger or acquisition and mitigate any risks of the deal falling through.

Jeannette Linfoot is an M&A consultant at Jeannette Linfoot Associates.

More on M&A

How to handle M&As without upfront capitalWith up to 70 per cent of SME owners approaching retirement age, there’s no better time to acquire an established business for a knock-down price, writes the serial entrepreneur Jeremy Harbour

How to reduce the likelihood of an M&A failureNew research explains why so many mergers and acquisitions ultimately fail and what businesses can do about it.

Jeannette Linfoot

Jeannette Linfoot

Jeannette Linfoot is an M&A consultant at Jeannette Linfoot Associates.