Wednesday, January 2, 2013

Six M&A Rules You MUST Follow

1. Have a clear vision. Having a clear vision of what you are trying to achieve through M&A is especially crucial for potential buyers because opportunities for acquisitions are plentiful – just because you can buy another firm doesn't mean that you should. For potential sellers, it can be flattering to be approached by a firm you have always looked up to but are you sure that becoming part of them will help you achieve your strategic goals? Selling your firm may very well be one way to reach your goals but it shouldn't be a goal in itself.

Bottom line – It is okay to be an opportunistic buyer or seller as long as the opportunity fits within your strategic or personal plan.

2. Be patient. It takes time. Active buyers are starting to report a shortage of "good" firms to buy in certain geographic areas and many sellers are facing extended searches for buyers due to internal and external marketability issues. Buying or selling an A/E firm is a big investment of time. Buyers should expect that they will approach many sellers and initiate deals that may go nowhere. Sellers need to understand that even if you have found the "perfect" firm, reaching an agreement with the first qualified buyer you meet is rare. Also, both parties need to realize that the time investment only increases after closing and it could be a year or two before the newly acquired firm has achieved optimum performance levels.

Bottom line – Buyers should start looking to make an acquisition 18 to 24 months before your strategic plans requires measurable results and sellers should keep in mind that it usually takes longer than expected to find the right buyer.

3. Get all of your financial and legal ducks in a row. Buyers and sellers both realize that some degree of legal and financial due diligence is necessary in any deal. Good buyers try to conduct their due diligence in a sensitive, non-disruptive manner and well-prepared sellers put their legal and financial affairs in order prior to seeking a buyer. Project due diligence however is still a big blind spot in many acquisitions that are otherwise well-conceived. In times of strong growth and profits, firms can bury the recognition of project budget problems under good cash flow. But remember, if you have just sold a long list of active projects that are upside down budget-wise, you will eventually have to answer for the resulting lack of profits.

Bottom line – Use earned value analysis to track project budgets and to conduct project due diligence. Small sellers with budget problems usually aren't trying to trick a buyer into buying their future losses, they simply don't know the true budget status. Buyers, don't try to avoid doing project due diligence by asking sellers to "guarantee" future profits – they can't. Take the time to truly discover the condition of the projects you are buying. You'll be glad you did.

4. Set up your Letter of Intent early. Too many firms are conceiving of a "term sheet" and the letter of intent as equivalent documents. This almost invariably leads to misunderstandings later in the acquisition process. Some buyers take the approach of sending a letter of intent to a seller based on relatively little information to see if there is any chance of reaching an agreement. Sellers rarely take these "pseudo-offers" seriously and the emotional commitment to the deal on both sides is small.  Even if the initial terms are acceptable enough to spur further discussions, there are still many issues that need to be addressed and included in a "high-quality" LOI. Leaving these issues to be resolved during development of the Definitive Agreement nearly always results in needless frustration and waste of time on the part of both firms.

Bottom line – The execution of a letter of intent should be a major event in the M&A process and while still non-binding, the LOI should be documented in enough detail (4-5 pages) that once it is signed, both firms are confident that the deal is going to happen. Once a high-quality LOI is in place, the commitment of time and effort in due diligence and integration planning can be made with confidence.

5. Don't forget about taxes. We are not advocates of paying taxes that shouldn't have to be paid, but if tax considerations begin to replace strategic motives for a sale or an acquisition, then your advisors have taken it too far. There is a thin line between tax management and tax avoidance and you must be careful to not cross it. If not managed properly, taxes can take a significant bite out of the proceeds of a sale or substantially change a buyer's financial pro-forma. But like many other issues in an acquisition, a compromise between the buyer and seller where neither has attempted to maximize tax savings is usually necessary for the deal to move forward.

Bottom line – Focus on after tax cash. Budget for taxes when planning for a sale or acquisition and establish reasonable expectations of after tax cash flow given "normal" deal parameters. If there are opportunities to pay less in taxes that benefit both buyer and seller, take them. But making 'unilateral maximum tax savings' a condition of the deal will most likely prevent any deal from getting done.

6. Culture is King! Many people who are experienced in M&A believe that the success of an acquisition hinges on the effective integration of the two firms, yet we still see many buyers and sellers ignoring or waiting too long to address cultural incompatibilities. All too often, buyers and sellers focus primarily on the "deal" and once an agreement is reached, they then go back and look for cultural alignment. This can be problematic because cultural alignment, not the financial deal, will have the greatest impact on the success of an acquisition.

Bottom line – Even if a deal makes strategic and financial sense, keep a critical eye toward the early identification of cultural differences and begin addressing them immediately after signing a letter of intent.

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