M&A: How to prepare your company for a successful M&A

If done correctly, merger and acquisition (M&A) can help a company increase its revenue, expand its geographic reach, increase its range of services, and effectively catapult it to the leadership position in its sphere. India has seen an increasing number of M&A deals come to fruition in recent years – with 2021 witnessing a remarkable increase in the value of such deals across the country.

According to a report by PwC, in 2021 India’s M&A deal activity was the highest in 5 years, with 806 deals closed for a total value of $48.9 billion. Companies seek to adapt vigorously to change, whether by adopting technology, acquiring new markets or diversifying their main activities. This activity is expected to continue in 2022 as companies seek to consolidate their positions in a highly competitive market. Mergers and acquisitions are a fantastic opportunity for inorganic growth, however, companies need to weigh several factors before embarking on this massive but potentially profitable exercise.

Create a win-win

The buyer must prepare for mergers and acquisitions by ensuring that the strategic vision of the acquired business and the acquiring companies align. This is an important aspect of mergers and acquisitions, as deals tend to be structured in a performance incentive or progressive payment process, and if there is a mismatch of vision, this leads to conflicts between the companies, making it a messy acquisition. The success of any M&A depends on retaining the employees of the acquired business. While undertaking the exercise, it is crucial that employees are prepared for the overhaul that the process brings. They should be willing to work under a different team or department head and ideally have the incentive to continue working with the company. The buyer’s team must not be brutal in their dealings because they are the acquiring company. The buyer stands to lose the most if the transaction does not go through.

Changing valuations and transaction structure

The seller should keep in mind that M&A transactions can be a lengthy process, sometimes lasting up to a year, with valuation changing for multiple reasons. This change must be well anticipated and must not discourage the seller from undertaking the transaction or link him to bad faith on the part of the buyer. Deal structure is influenced by a plethora of variables – such as the percentage of the total deal size paid upfront and the number of years the founder agrees to be retained – the acquired company must be clear about the acceptable level of risk it is willing to accept and what it wants to cover upfront. The majority of transactions are structured to have a payout mechanism where the seller receives a certain percentage of the value of the sale after the business is successful based on mutually agreed terms. In most M&A transactions, there is also a non-competition clause for the founder. According to this clause, the founder of the acquired company cannot establish another company in the same sector for a mutually agreed period of time.

Minimize the transaction cost for the seller

One of the main challenges posed by a merger and acquisition is taxation. A company can be acquired through several structures, including the sale of whole shares or simply the sale of its intellectual property. Both come with their own set of tax challenges, including corporate tax, GST, and dividend tax. Determining the best deal structure to maximize tax savings is an important consideration when executing M&A transactions.

The seller must keep a clean book of accounts

It would be useful to note that compared to the process of structuring the transaction, the time required to undertake financial due diligence takes longer. In order to rationalize the task in time, the acquired company should endeavor to keep a written record of all the financial transactions it has undertaken. Every transaction undertaken by the selling company should be easily traceable and agreements should be linked to billings and cash flow and adequately reflected in the seller’s bank account. A robust MIS helps maintain good financial hygiene and record detailed financial statements.

Work with professionals

It is imperative to engage with strong M&A professionals who can fully guide companies through their deal process. Bankers and lawyers, who have worked on mergers and acquisitions transactions before, must be duly hired. They work with companies throughout the entire transaction journey, creating options on potential buyers/sellers, evaluating synergies and therefore relative valuation with a focus on maximizing it, forming a negotiation strategy of valuation and creating a business structure covering valuation and other intangibles. of the transaction. Working with professionals ensures that the transaction process is smooth and expedited in minimal time.

Is it worth it?

Yes! Mergers and acquisitions help companies expand their product portfolio, geographic reach, and further integrate backwards or forwards throughout their supply chains. A few important points should always require full vigilance when executing these transactions. Being very clear with the goals of an M&A on each side, engaging with a strong banker, and ensuring team alignment on each side are imperative from a synergistic perspective. Founders should also try to clarify the time it takes to complete a trade, prepare for valuation fluctuations, and maintain an accurate and understandable MIS. The combination of these factors should pave the way for a successful transaction creating tangible and intangible value for the benefit of all stakeholders.

(Sumir Verma is Founder and Managing Director, Merisis Advisors)

(Sakshi Singh, Investment Banking Partner, Merisis Advisors contributed to this article)

(The one-stop destination for MSMEs, ET RISE provides news, views and analysis on GST, exports, finance, policy and small business management.)

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