Planning Merger Integrations

by Stephanie 28. September 2012 18:12

The M&A climate has been tough in 2012. Not only are fewer mergers occurring, but 50-80% of the completed deals are failing. Whether it’s a clash of cultures, failed synergies, or something in the water, it seems like only a matter of time before you find yourself in the midst of a failed integration.

To help us understand how to avoid failed integrations, we spoke with Danny A. Davis, one of the most respected integration specialists in the UK. Davis is the founder of DD Consulting and recent author of M&A Integration – How to do it from Wiley.

Davis explained to us that one of the most important steps in preparing a successful integration is the act of comprehensive planning. Ill-planned strategy is more likely to derail a merger than any culture clash or issues with synergies. He explained, “The reason people come down to culture and communications is because they are used as excuses when things go wrong. Rather than admitting they’ve done something wrong or that they had a bad strategy, people talk about culture. It is more important to think and plan the integration strategy for the companies, the products, and the people.”

During our conversation, Davis walked us through some of his most important planning techniques. When preparing for a merger, Davis finds it important to consider everything, to begin the process with a standard working procedure, and to plan for the plannable. A few highlights from our conversation are below:

Early Planning Helps You Find the Right Deal at the Right Price:
“I like to start planning as early as possible. Ideally, you would start planning as soon as you decide to buy something. Although you don’t want to spend too much time and money planning (since you are unsure if the deal will close), it is extremely important to do some planning. If you have no plan for the target company, you are going to pay the wrong price and you are not going to be ready to handle the integration. I would do a couple of days planning right at the start. At latest, I would start building a full integration plan around 100 days before you believe the deal will take place.”

Consider Everything when Sourcing Deals and Picking a Target:
“When determining merger criteria, you need to consider absolutely everything. If you were to start with a blank sheet of paper and invent a 5,000 person company, you would need to consider every process and every situation to determine the best strategy. Although you may not ever start with a blank piece of paper, you still need to consider everything. By considering all the necessary elements, you can build the most effective strategy.”

Build a Standard List of Items to Review when Planning an Integration:
“For each merger, I have a list of about 6,000 items to consider. With every new deal, I add a few items. Although deals are always different, and require different plans for different items, we can take a somewhat standard approach to increase efficiency. Many companies start from scratch each time, which costs money.”

“As deals get larger, they becomes more complex and the list changes. For example, with a $5 billion deal, I will likely make plans for each of the 6,000 items on my prepared list. However, if I’ve got a small deal - $5M - $10M - I can quickly narrow the list down to a few hundred items. The rest of the items are irrelevant or not appropriate for that deal.”

Accept the Unknowns:
“As you plan, there will be a whole slew of information that you can’t plan for because your due diligence only throws up a certain amount of information. Although you may have a full plan, there will always be information to find out. It is better to wait until you’ve bought the company to discuss these issues. After the first few days or weeks, you will be much better equipped to answer these questions and issues. In some cases, the target company may have already thought about the issues and you can adopt their strategies.”

Early Planning Makes You an Effective Decision Maker and Executor:
“If you have a strong plan established, you can communicate effectively right off the bat. Many problems in deals originate from indecisiveness. Good planning and early planning leads to quick decision making, quick delivery and good communications.”

The strong foundation of effective decision making and good communications prepares you to handle the typical challenges of post-merger integrations. We plan to continue this conversation with Davis and publish an article next week discussing the typical challenges found in a post-merger scenario - especially around planning for integrating divisions, dealing with internal politics, and what you should focus on first.

Thinking about starting the “Exit Process”?

by Stephanie 9. September 2012 20:28

 

Thinking about starting the “Exit Process”?

Do you have a transferable entity, or a high paying job?

Too often private, middle market companies are not prepared for the proper liquidity event they desire in their eventual exit. Buyers in the capital markets today are looking for a transferable entity not a high paying job. Risk mitigation in today’s buying community has become more important than the sophisticated engineering models of EBITDA. Most sellers realize this paradigm shift after it’s too late. Once an owner starts the process often times the “cracks in the sidewalk,” begin to appear.    

At IAG we work with you to develop a comprehensive exit plan that will fit your specific needs. Exiting a business means different things to different people and exit strategies can vary significantly. An owner's goal may be to simply free up time, energy and resources to explore other interests or they may want to walk away from the business completely. Most likely, an owner's goals are somewhere in between.

Choosing the best exit strategy involves a careful assessment of your personal, family and business goals and circumstances. While financial needs are certainly an important factor, there are many other considerations that need to be factored into a well-planned exit strategy.

If you know these strategies and decide in advance which one is best for you, then you have a better chance of leaving your business under your own terms and conditions. Without planning, you are more likely to settle for terms beyond your control. A comprehensive exit plan will consist of many areas both discreet and obvious.

Value Enhancement Strategies

Sophisticated business buyers consider a number of factors in their evaluation of a company. We have identified over 93 important factors that buyers need to consider in determining the value of a particular company. These factors are divided into Personal, Business Operations, Industry, Legal / Regulatory, Financial, and Economic / M&A Market. Each factor should be rated as an area of strength, an area of potential improvement, or as neutral meaning it has no major effect on the value of the company. The company should then focus on highlighting strengths and mitigating weaknesses.

Value Enhancement focuses on improving the profitability and cash flow of the business while attempting to mitigate the risk involved in the ownership of the business, making your business an "excellent" performer in the industry. This involves all aspects of the business to include facilities, production and personnel, as well as financial performance.

Key questions you need to answer:

1.     Is my company dependent on me?

2.     How do I compare to other companies in my peer grouping?

3.     Do I have proper management metrics?

4.     Is my management team transferable or effective at all?

5.     Is my client concentration adequate or do I generate business from one major customer?

6.     What is my return on labor cost?

7.     Can I portray quality of earnings or am I up and down?

8.     How can I create critical mass in my company?  

If you don’t have a positive answer to all of these simple questions, IAG would like to present you with an opportunity to participate in our “ERA” or Economic Reality Assessment practice. This two day analysis will help you and your family realize the areas of your business which need to be addressed before making the decision to sell. Let’s face it, there isn’t a perfect company, however buyers are demanding such. What good is quality of earning if you can’t graduate from due diligence?

Contact us at info@intlag.com. The IAG website at www.intlag.com can also be referenced for more information. 

Remember the last place you want to find out that your company is only worth a dollar (1.00) is at the closing table!!!

Selling More Than Just Your Business – A Primer on Successor Liability

by Stephanie 11. June 2012 19:36

The following article is from one of IAG's partnering groups, AxialMarket.

When you sell your company, it’s possible, even likely, that some liability originating from the period of your ownership will befall the new owner who buys your company.

This creates for a sticky issue when you are negotiating the terms of the purchase and sale agreement in an M&A transaction. Neither party wants to assume any liability post-transaction, and the buyer will do everything they can to protect themselves against any assumed liabilities, which include, but are not limited to product, contractual, tax, and environmental liability issues. To avoid post-transaction litigation, it’s important to identify all knowable liabilities and clarify specifics around who is assuming what when drafting the purchase agreement.

In general, when the sale is structured as an asset sale, the buyer does not assume liability, whereas if it is structured as a stock sale, they do assume at least some amount of liability.

Regardless of how the sale is structured, the development of Successor Liability Laws has defined the situations when a buyer is always responsible for the liability of the previous owner, under any and all circumstances.

The Successor Liability Exceptions are:

  • Continuation: If the sale of the company is a continuation of the original company, the buyer can assume liabilities. Depending on which state litigation occurs, what defines a continuation can be interpreted very broadly or narrowly. Characteristics of a continuation include ownership of assets, continuation of the company officers and their roles, and inadequate consideration paid for assets.
  • De facto Merger: Technically speaking, a merger differs from a continuation, but in terms of successor liability, they share similar characteristics. In addition to the factors mentioned under continuation, the courts can also look to see whether operations or the physical location are the same, whether the new owner maintains the company name, and whether or not public perception has changed.
  • Assumed Liability: In this instance, the buyer chooses to contractually assume specified liabilities from the seller.
  • Fraudulent Transfer: If a seller sells the assets of its business with the intent to defraud creditors, they continue to assume liability for the company.

When selling your company, you should consult an attorney to fully understand what measures you should take to negotiate liability. Negotiations over the assumption of liabilities is usually a give and take but also can surface some real dealbreakers, so during the negotiation stage of the M&A transaction, keep the following in mind:

  • In the purchase agreement, clearly define to what extent the buyer should assume liability under different circumstances.
  • Make sure you indicate a resolution for liabilities not stipulated in the purchase agreement.
  • Understand your liability if you plan on continuing with the new company, either in a consulting, executive or board position.
  • Be sure to take into consideration how the company is paid for (cash, stock, debt), as it can impact who assumes responsibility for certain liabilities.

By assuming any post-transaction liability, you reduce the risk for the acquirer, which can impact the purchase price. An experienced buyer will often uncover much of the liability risk during due diligence, which will help avoid post-transaction complications. Moreover, a good M&A Advisor will help you navigate and negotiate your rights as a seller.

By Jamie Romero

 

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