Top 5 Stumbling Blocks in M&A Transactions (and how to step over them)

Posted on: December 19th, 2016

During an M&A transaction, there are many issues that should be addressed upfront– preferably at the “letter of intent stage” or soon thereafter. If not addressed, they can very well become massive stumbling blocks that can inhibit a smooth transaction.

Here is a list of the top 5 complications commonly present in M&A deals and how you can avoid them.

1. Financials

In most cases, business owners don’t review their financials on a regular basis, leading to them being unaware of important financial information that is critical during an M&A transaction. They are unable to provide buyers with the detailed financial statements that are required.

To avoid this pitfall, it is imperative that you have clear financials, allowing for the possibility of capturing as much data as possible. Stress on effective accounting procedures, and give your CFO and other staff the resources needed to be compliant.

2. Supplier Relationships

A substantial value of a business can often hinge on successful supplier relationships. If a vendor is unable to be flexible or timely in transferring contracts, it could cause delay or even cancellation of the deal.

During an M&A transaction the business owner must take responsibility for vendor agreements and be prepared to provide these agreements to prospective buyers prior to the closing of a deal. This includes all suppliers including landlords, product vendors and technology vendors.

3. Customer Relationships

Customers are the lifeline of any business and successful transferring of customers to the third party is a requisite for any M&A transaction. One major stumbling block that can occur is in the area of customer relationships.

In some transactions, key managers in the management team may be over protective of their customer relationships and not cooperate with the assignment of customer contracts. Avoid such situations by having more than one salesperson involved in all customer relationships.

The relationship needs to be broad based across the company as opposed to localized in one individual.

4. Deal expectations

Whether you are buying or selling, dealing with unsure expectations can often become a stumbling block. For both acquisitions and mergers, it is important to have a clear game plan before entering negotiations.

Have a clearly articulated valuation expectation and a well-defined timeline. Consider each issue individually and decide earlier on whether it is negotiable and if so, how much will you be willing to stake.

You can also choose to rank each issue in terms of its importance. This will make it easier to identify opportunities that suit your needs and decide whether such an opportunity meets (or exceeds) your expectations.

5. Third party advisors

Third party advisors if not chosen correctly can be a hindrance to successfully completing an M&A deal. A typical advisory team should consist of an accountant, tax expert, lawyer, financial advisor, business advisor, and an M&A consultant Since these individuals each play a unique yet important role in the negotiation process, it is wise to choose experienced individuals with a solid background.

Knowing about expected stumbling blocks and preparing yourself in advance will enable your M&A transaction process to be smooth and successful, without any hindrances or delays.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.