Are you approaching a merger or acquisition? Learn about the seven crucial steps involved in a merger or acquisition, providing you with a comprehensive understanding of the M&A process from start to finish.
Contents:
What is the M&A process?
The M&A (mergers and acquisitions) process is a series of steps which are typically followed in order to complete the sale and purchase of the assets or shares of a business, often called the 'Target'. The buyer is looking to purchase the Target at the best possible price. The seller is looking to achieve the highest price for the Target and a clean break from any continuing liabilities.
The process can typically be broken down into seven steps which we will look at in further detail later.
How long does the M&A process take?
It is very difficult to say as every transaction is different, but a typical straightforward share or asset acquisition will usually take a minimum of 6-8 weeks from agreement of Heads. Where there is the will from all parties to devote all their resources to the deal, things can proceed more quickly. Equally, if any pre-sale restructuring, employment issues (such as TUPE consultations), cross-border elements or consents need to be obtained, things can take a lot longer. A typical transaction will take 8-12 weeks to complete from agreement of Heads.
Should you use an M&A lawyer?
You should seek guidance from an experienced M&A lawyer when putting together or considering an offer, i.e., before Heads are agreed and signed. Particularly sellers, but sometimes buyers, will struggle to renegotiate the key terms of a transaction once Heads are signed.
Most people only sell their company or business once in their lifetime, some perhaps twice. And even the most experienced buyers/buying teams may do a handful of deals in their careers.
An experienced M&A lawyer will be able to bring their years of experience to the table, of having done M&A transactions day in and day out. They will look at the transaction from all angles and will provide invaluable insight on structuring and will identify any pitfalls and how to work around them. Often, they spot the things that neither buyer or seller have thought about or realised.
You will need a legal team to ensure due diligence is carried out thoroughly and issues arising from this exercise are covered off in the acquisition agreement. M&A lawyers will also liaise with other teams of specialists such as employment, property and tax lawyers to tie together all aspects of the purchase or sale of the business. They will then ensure the terms of the deal are documented properly so that liabilities and obligations fall where the parties intend them to fall.
The seven steps
Step 1: strategic planning, target identification and initial research
The first step is to identify the Target (or potential buyers, if you are selling) and start exploring whether the Target would be a good fit for the existing business - identifying any synergies between the businesses and thinking about what changes may be necessary to complete a successful integration. Consideration should be given to any consents or clearances which may be necessary during the process and whether obtaining these would be feasible within any agreed timeframes. Pre-sale restructuring steps may also be necessary at this stage, for example to isolate the Target assets into a new company (newco) whose shares can then be purchased.
This first step, from the buyer’s point of view, may include making arrangements for the financing of the deal. Buyers may need to (or choose to) raise finance to acquire a target whether by way of a loan (debt finance) or the issue of further shares (equity finance). The buyer should ordinarily have a plan or offer of funding in place before the buyer commits to Heads and when agreeing on timing for completion of the deal.
Step 2: the offer
Letter of intent (LOI)/term sheet/heads of agreement – the 'Heads'
If everything looks good after the first step, then the second step is to agree the key terms of the deal, for example, structure, timing, price, conditions of the deal. These will typically be set out in a ‘letter of intent’ (also called a ‘term sheet’, ‘heads of terms’ or ‘heads of agreement’) which is not intended to be legally binding apart from certain provisions such as an exclusivity clause. Exclusivity clauses restrict the target from being in discussions with any other potential buyer for an agreed period.
You should use an experienced M&A lawyer to help you with the Heads. It is easy to think of the Heads as a ‘kick-off’ document, but in reality, this cements in the key terms on which the deal will proceed. Cement is hard to break.
Non-disclosure agreements/confidentiality agreements
Confidentiality agreements or non-disclosure agreements should also be put in place at this stage before disclosing any sensitive business information to interested buyers. Confidentiality provisions are often legally binding terms in the Heads.
It is important to have an M&A lawyer to ensure the confidentiality agreements are watertight. As a seller particularly, you should be ensuring that the secret and valuable information about your business is properly protected- don’t rely on a random template downloaded from the internet to protect something so valuable!
Step 3: due diligence
The next step is the due diligence process, which is an information-gathering exercise performed by the buyer on the Target. The aim of the exercise is to allow the buyer to elicit sufficient details about the Target in order to reassure the buyer that the acquisition should go ahead and that the terms of the deal make commercial sense. If any major issues are brought to light during the due diligence exercise, then there may need to be a renegotiation of the price or certain indemnities and/or conditions included in the acquisition agreement.
Step 4: the ‘legals’
Often called ‘the legals’, this step involves the parties’ lawyers drafting and negotiating the terms of the transaction documents, the main document being a sale and purchase agreement containing the terms of the deal agreed between the parties, based on the Heads and any adjustments required due to things arising in the due diligence process.
The sale and purchase agreement will ordinarily contain warranties, and in respect of concerns revealed in the due diligence process indemnities, to give contractual protections to the buyer. These usually take up a lot of time in negotiations as the sellers will be keen to limit their exposure under the agreement while the buyers will want the maximum protection from any liability arising post-completion relating to the period before completion.
Both seller and buyer will need to get heavily involved in agreeing the terms of the sale and purchase agreement and other transaction documents. People often underestimate the time this will take from their daily operations in their business.
Step 5: completion: closing the deal
The closing stage or completion of a transaction requires a great deal of planning and organisation to ensure all the necessary paperwork is agreed and ready to sign on both sides. This is where teams of M&A lawyers will be liaising to make sure all goes smoothly. The signing and exchange of documents was traditionally carried out at completion meetings where all parties and their legal teams were present, however, it is much more common now for this completion process to be done virtually and using electronic signatures.
Step 6: post-closing and post-merger integration
There are usually a number of matters to be completed by the parties and their legal teams post-closing. This could be filings at Companies House, paying stamp duty on shares or issuing notices to customers and suppliers.
Once the deal has been closed, the hard work of post-merger integration can begin. Ensuring you have a plan for this integration from the very start will go a long way to making the integration smoother and easier for all involved. It is crucial to build trust with the Target’s employees, customers, suppliers and so on. This process should have started with the sellers during the negotiation stage and can be reinforced by ensuring communication is transparent to avoid rumours and cynicism. Even though the sellers may not stay involved with the business, it would be helpful to have them on side if needed post-closing.
Step 7: monitoring and evaluation
Post-acquisition audits are a tool used by many businesses to monitor the success of an acquisition. It typically involves a review of the M&A process and an assessment of the success of the integration. Monitoring of the warranties and indemnities and any other continuing terms of the acquisition agreement is also important so that any potential claims can be assessed and any obligation deadlines met.
Key takeaways
The M&A process can be very lengthy and involved which is why it is important to recognise the distinct steps. This should help with your preparation at the start of the process to ensure you achieve a successful acquisition and integration.
Making sure you have experienced legal and financial advisors on board together with early preparation and planning are the key takeaways to achieve a successful M&A process.
For more answers to commonly asked questions and advice on company acquisitions, consult our M&A solicitors. Get in touch on 0800 689 1700, email us at enquiries@harperjames.co.uk, or fill out the short form below with your enquiry.
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