Mergers and acquisitions are some of the most difficult maneuvers to pull off in business.
Whether one is the CEO of a large multinational or a solopreneur looking to combine forces with another business, ensuring that one has all of his or her ducks in a row can be a daunting task.
From making sure that the company cultures are compatible with each other, to sorting out the leadership structure of one’s new enterprise, it seems there’s no end to the tasks that must be completed.
At DealRoom we help companies organizing their M&A process and here we have prepared a guide about all of the pieces one has to make sure fall into place during a merger.
1. Compare and analyze the corporate structures
Before executing the merger, the structure of each company needs to be carefully examined to determine the best procedure for merging with or acquiring the business.
So, for example, a corporation seeking to merge with an unincorporated sole proprietorship may prefer to structure the merger as an acquisition by the former of assets owned by the latter.
On the other hand, two corporations seeking to merge may prefer to create a new corporation in a consolidation deal, in which the new entity acquires all of the shares of the two pre-existing companies.
Be sure to take into account the many perspectives when crafting the legal structure of the merger.
Of course, the interests of all the stakeholders of the merging companies needs to be considered, lest the proposed merger be scuttled by an unhappy owner or shareholder.
Tax considerations often take center stage as well as inefficient deal structuring, both of which can have negative impacts on both companies.
2. Determine the leadership of the new company
Once the structural details of the current organizations and the proposed merged organization are sorted out, the leadership structure of the future company needs to be established.
This can be a fraught subject as, frequently, the leaders of both companies wish to take charge of the new company.
Unless the leadership of both firms is already aligned with what the new company will look like, one may need to have conversations regarding who will take the reins of the merged firm.
In addition to determining who will lead the new company, the leadership structure will need to be determined. If the merged entity is a corporation, a board of directors will need to be appointed and officers elected.
The managerial reporting structure will also need to be created.
This, too, can be a difficult subject as the new organizational chart may run contrary to one or both of the old companies’ cultures.
3. Compare the company cultures
Company culture is a bit of an intangible factor, but that doesn’t make it any less important. Companies, like families, have internal dynamics that can lend themselves well to a merger or make one extraordinarily difficult.
Before taking on a new firm, spend time at the offices of the company talking to the founder and any employees he or she might have.
Gauge how open to change the members of the merging company are, how willing they are to work under new leadership, and how easy they are to work with in general.
4. Determine the branding of the new company
The branding of the new company takes center stage after the merger. Pay close attention to how one wants to market the new company, post-merger.
- Will it retain the branding of one of the merged companies?
- Will it use a combination of the branding components of the previous companies?
- Or will it employ an entirely new brand?
Similar to the leadership question, the method of branding the new company can bring out a lot of emotions in the leaders and employees of the former companies.
They might see a changed branding choice as a negative comment about their former firm or as an indication that what’s actually happening is an acquisition of some sort.
5. Analyze all financial positions
It goes without saying that a careful analysis of the financials of the company being merged with another must be undertaken well in advance of any action.
The financial strength of a merger target can make or break merger plans, as large amounts of debt or liabilities can make a successful merger all but impossible.
While possible to carry out a financial due diligence oneself, it is unlikely that a small business owner has the accounting proficiency necessary to spot every issue that may arise.
The services of a qualified accountant can be invaluable at this stage.
A tax accountant can also be extremely useful when conducting a financial analysis of a merger target.
He or she can identify any significant accrued tax losses or gains which one could exploit or suffer from, respectively.
6. Determine operating costs
In addition to examining the balance sheet of a merger target, take a careful look at their recent (and not-so-recent) income statements and statements of cash flows.
These statements can reveal whether the company is operating under significant operating costs or has an unusually high weighted average cost of capital.
These issues can become large drags on the productivity of a merged company and should be uncovered well before the entity is absorbed into one’s own.
7. Do your due diligence
Before proceeding too far with a merger, perform due diligence on the potential merger. The reason for this is obvious. Depending on the nature of the merger, the new company may inherit the liabilities of the merging company.
Tax debts, legal judgments, and liens on real or personal property can all attach themselves to the new enterprise when it is created.
It is imperative that a small business owner seeking to merge with another company perform all of the necessary diligence and fact-finding necessary to ensure that nothing spoils the merger.
Read also “Why Teams Need Modern, Live M&A Playbooks“.
8. Conduct a valuation of all companies
In order to determine the terms of a successful merger, ascertain the value of each of the companies being merged. This is necessary to fairly allocate shares of the newly established company to the owners of the former companies.
For example, if one establishes Company A is worth $500,000 while Company B is worth $250,000, merged Company C should normally have its shares allocated proportionally.
Valuation methods vary from situation to situation, but ideally one will retain a valuation expert utilizing some form of a discounted cash flow analysis to determine the present value of each company’s future cash flows.
9. Be transparent as possible throughout the process
Though some information will inevitably have to be kept confidential, keeping employees in the loop is imperative to a smooth transition. When it comes to people’s livelihoods, the less surprises the better.
Key staff should be reassured the merger or acquisition will not result in any radical changes. One should be as honest as possible in terms of how, if at all, pay will be affected, how new positions will be filled, and any new criteria or policies that may apply.
10. Keep the momentum going
It can be easy to get caught up in the commotion of a merger or an acquisition. However, if management allows either company to get distracted, it can stunt the growth of the entire deal and affect future success.
The CEO must set the tone for staff to follow during this time.
By setting clear targets and goals, one can keep the rest of the company on track for success and keep everyone accountable during what can be a very hectic time.
Emphasize key leader characteristics and let it be known there is a standard of performance to adhere to. Organization is key to a smooth transition.
The above information should draw the reader’s attention to some of the major issues that can arise during a merger.
Being comprehensively aware of these potential roadblocks should dramatically decrease the chances of something unexpected occurring during a merger.
While much more information should be sought out by the owners of both companies on all of the aforementioned issues, the topics discussed gives the reader a head start on research.