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Mergers & Acquisitions (M&A)

Financing Mergers and Acquisitions (M&A)

Capital is a necessity for executing on a strategy that involves mergers and/or acquisitions. There are many ways to fund the transaction, but the funds are generally used for the same things; the purchase price but also additional costs such as legal fees, premises and inventory. Not to mention capital required for change management after the transaction closes.

The most common form of M&A involves the acquisition of one company by another through the purchase of shares and/or assets of another. This may lead to the creation of a new entity or the merger of one in to another. Such transactions enable companies to rapidly expand by a land-grab of new customers, product expansion and economies of scale.

You can fund M&A activity through many forms of funding, although in our experience, you are most likely to have success raising capital through private credit and/or ABL.

M&A strategies

The reasons for and benefits of M&A can be far reaching. The effectiveness of M&A depends on strategic fit, financial rationale, and successful integration. As advisors we have seen multiple scenarlos including;

  • Growth Expansion: Companies aiming to quickly expand market reach, product lines, geography or add new services.
  • Consolidation: In mature or crowded sectors, M&A can help firms consolidate market position and achieve economies of scale.
  • Diversification: Businesses looking to reduce dependency on a single market or product might use acquisitions to enter new areas.
  • Acquiring Technology or Expertise: Businesses often buy others in order to access new technologies or expertise. In the SME world, this is often means making acquisitions down the supply chain,
  • Financial Synergies: Companies seeking cost savings or revenue enhancements through operational integration.
  • Exit Strategy for Entrepreneurs: Start-ups and small businesses may view acquisition as a successful exit, offering a return on investment.
  • Turnaround Situations: Firms in distress or aiming to shed unprofitable divisions may use M&A for restructuring.
 

The deal process

Target identification & engagement

Identify your target acquisition based on strategic objectives & engage them to ascertain if there is a fit.

Understand funding requirement

If there is a fit, any funding gap will need to be identified & a strategy put in place to fund it.

Negotiation, letter of intent & exclusivity

Once funding is feasible, terms must be negotiated with the vendor. Upon agreeing to a letter of intent, a period of 6 weeks to 6 months follows to finalise the deal.

Due diligence & legals

Ensuring thorough vetting and alignment of interests with these partners will greatly enhance the efficiency and effectiveness of the due diligence process.

Funding in place

Alongside the due diligence, the funding facility deal will be being set up & you will need this in place and ready to go for completion.

Deal closing & integration beginning

As the deal completes, the corks pop & the fun begins...

Items to consider & FAQs

Items to consider:
M&A transactions can be complex and completion rates from letter of intent are under 50%. Of those that do complete, not all of them are success stories. M&A can be an absolute game changer for businesses, but it needs deep consideration. As advisors we suggest that business owners and entrepreneurs consider many things before entering into any transaction:

What is the strategic rationale for the deal?

Does the deal align with previously set business objectives? If not, why is it opportunistic and why will it be valuable to the business?

What would failure mean for the existing business?

If the transaction fails to be successful, what does that mean for the current business? If it is potentially disastrous, how can you mitigate this risk in the deal conversation?

When do I think about financing a deal?

From the very outset - even speaking to a target without understanding what you can and can't do is unwise. A bit like starting building work without a budget!

What about culture?

Culture kills companies, and we have seen, even in the most logical of transactions that misaligned culture (and misaligned management) can make a transaction fail and often fail badly.

How are you reaching a valuation?

In the SME world, valuations are often bunk, but there needs to be logic to it. Even if the logic is fuzzy, the buyer must have reasons as to why they are paying what they are paying. Reasons could range from a multiple of [EBITDA] or could be as intangible as 'buying our supplier will save us X over 10 years, so it is worth Y"

Due diligence - how deep should we go?

Ensuring that you get under the bonnet in the due diligence process is essential. Having as much information at your fingertips at least allows you to understand issues and understand the business in depth before signing anything. Deals are often done on intangibles and emotion, but we always advise our clients to at least ensure they have all the information there before going with the same decision.

What are the costs involved?

Any transaction has a fair amount of mouths to feed, so keeping control of costs is an imperative part of the advisors job. Prior to completion, you will have to pay the advisor, the DD provider and the lawyers at a minimum alongside any setup or take on costs of financing. Post completion there may well be considerable costs involved in the integration; in many cases for starters having 2 systems, a new strategy and operational duplication can be costly to unwind, ditto any severance/redundancy costs as well.

Can you give one piece of free advice?

We can give 2 - 1. Be prepared to walk away at any point 2. Align the people involved and the rest usually follows.

Here to help - Get in touch with our team

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