Ready, Steady, Exit! - MergeAcq.Com

Merger and acquisition (M&A) deals are booming. For example, over the last year, Google acquired $32bn for Wiz and Palo Alto Networks acquired CyberArk for around $25bn. All this has helped keep the AI world busy.

However, M&A deals tend to be 10% economic, 10% tax, 10% legal, and 70% psychological. The “smell of the money” has an effect on people’s behavior in many deals.

What is a fair price for the purchaser (buyer) and the seller, and what conditions should apply?

In other words, how much is the cake worth?

We briefly discuss below some of the factors for buyers and sellers to check out before any M&A/exit deal.

Typical Steps:

There are a number of stages for all sides including the following. Preparing objectives, reasons, information, advisors and the business itself. Find candidates, woo and negotiate. Reach an initial Letter of Intent. The buyer will do due diligence on the seller’s business. The seller will check the buyer can afford the deal. Execute the final agreement. Post deal integration process.

What types of deal do you want?

There are many ways to cut the deal. Do you want a share sale? An asset purchase? A management buyout by existing management? A management buy-in by a new hungry but experienced team or private equity fund? Or a just an exclusive license or supply contract. Much will depend on tax, who is the stronger party and the overall circumstances.

What are the seller’s reasons for selling?

Typically the seller wants to cash in a capital gain and/or retire. Another common reason is lack of marketing abilities. Such possibilities may present an opportunity for a prospective purchaser….

What are the buyer’s reasons for buying?

In our experience, buyers fear falling behind. The buyer typically wants access to a new product or new technology. Other reasons for buying include access to new customers or sector, economies of scale, market dominance, turnaround opportunity, asset opportunity. But the buyer must do due diligence on the seller’s business and plan “the morning after”.

What are the main methods of sale?

Methods of sale include a trade sale, financial sale, auction, IPO, exclusive license or supply, buy-out, buy-in.

Valuing a business:

A business is worth what another party will pay for it, no more, no less. Possible
bases for negotiation include: multiple of past or future expected profits; asset based valuation; or many others e.g. contingent earn-outs, market share, key technology, brand value.

Have your business plan ready:

As Paul Simon sang, “Get a New Plan, Stan!” (50 Ways to Leave Your Lover).

Both sides need a business plan. Set goals. Have a strategy and time-table for achieving the goals. Share relevant parts with employees.

Predicting the future is difficult, but necessary to help identify relevant factors. What matters in particular are the assumptions made – they need to be listed and make sense

Preparation!

Here’s a few things that a potential seller should prepare for the due diligence (review) process of a potential purchaser. Both need to prepare.

Is the intellectual property (IP) protected?
What are the unique selling points of the product or service concerned?
Is the business in good shape?
Can profitability be reasonably enhanced?
How is the cash flow?
Are personnel performing well?
Are management performing well?
What will the main negotiation issues be – price and what else?
Are the founders prepared to stay on to help achieve a smooth handover?

What about the tax side?

Sellers usually prefer a share sale. That way shareholders may pay limited capital gains tax but this needs checking in each country concerned.

Employees on a stock option plan also want to minimize their income tax/capital gains tax/social security liability. And they are afraid they may be let go.

But the buyers typically prefer to buy the main assets – which can increase the overall tax liability considerable for the sellers.

Sometimes buyers, especially those listed on a stock exchange, pay with their own stock (shares), not cash. There may even be a lock-up period or instalments. If so, the sellers can the sellers defer their tax hit until cash arrives? Often they can’t. Detailed rules exist and advance planning is absolutely essential for both sides.

Moreover, the buyer must sometimes withhold tax from the sale consideration unless the sellers produce official clearance for any lesser rate of tax.

The transaction agreement will need to reflect all these tax aspects among many others.

Additional aspects:

The above is taken from the book “M&A This Way!” by this author – see the link below.

As always, consult experienced legal, tax and other advisors in each country at an early stage in specific cases.

[email protected], https://mergeacq.com/ma-book/,

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.