PHASES OF AN M&A PROCESS

The objectives of transactions of mergers and acquisitions – M&A might be related to strategical growth or simply seeking for a rewarding financial feedback. One way or the other, M&A transactions involve various steps with different levels of complexity which are presented and described below.

The first step, considering the seller’s point of view, is the preparation and it is split in a number of activities. One should identify the shareholders’ motivations under the desire of selling the business entirely or partially and what are their expectations in terms of valuation, conditions and terms; analyze the current economic-financial situation of the business and propose growth and development strategies; organize legal and accounting documents which will be required for Due Diligence process; and identify contingencies and risks of the business, as well as preparing a plan to reduce or eliminate them.

After the stage of expectations acknowledgement and preparation of the company and of the shareholders for an M&A transaction, the business is ready for potential investors attraction. The company can handle this step with a focused strategy, with specific possible buyers which are already in contact or were identified by the sellers; or a wider strategy which will involve mapping the potential investors and contact each one of them. It is very important, at this point, to have presentation and institutional materials and an appropriate pitch prepared because they can be decisive for the continuity of negotiations with investors.

When the company has the attention of a possible investor, a new phase in M&A process is initiated, generally with the signature of a Non-Disclosure Agreement (NDA) among the parties. This document protects both parties to share economical and financial information, documents and other information required by the investor to confirm interest. The stage of information exchange is crucial to negotiation, and it is generally when the parties start to address issues that will influence in price and other business conditions. Following to the evaluation of documents and information, the potential investor might send a Letter of Intent (LOI) covering the amount they are willing to pay, the expected conditions and other relevant information.

The price proposed by the investor might be nominally set or associated to some method of valuation, one of the most common is Multiples, widely used with EBITDA (earnings before interests, taxes, depreciation and amortization) for instance. Regardless of the desired price, it is essential that the company calculates its own business valuation previously in order to acquire an understanding of the business value in current situation, which will serve as reference for price negotiation with the investors.

Following to the negotiation and structuring of main terms, it is expected that the investor holds a legal and accounting inspection on the business object of the transaction, this process is called Due Diligence and it is conducted by accounting and legal auditing companies hired specifically for this purpose. This phase is crucial to negotiation and closing, because all risks, contingencies and numbers (assets and liabilities) previously presented will be investigated. In the event the company has unregistered or uncertain liabilities, the negotiation might not go through or they might be considered as contingencies and be object of a partial holdback amount until the contingent risk is eliminated or until it becomes really due.

Finally, the last phase of the M&A process is closing the deal through definitive agreements, which are most rarely simple, because they cover various terms, protection clauses for both parties, power delegation, administration clauses, guarantee letter, contingencies rules and others. After business closing, there is algo the challenge of integrating both companies and the transition from one administration to the other; this a critical stage in order to achieve the goals expected with the M&A.

Each phase presented herein may be split in a number of activities with its own complexity. In order to have the most smoothly M&A process possible, covering all criteria for each step and considering how each action impacts in the business closing, it is very important for both parties to have assistance and supervision of a consulting company specialized in this kind of business.

 

By Gabriela Kauer