M&A Do’s and Don’ts for Purchasers

Given this we wanted to share our top Do’s and Don’ts as it relates to M&A transactions for prospective buyers:

Letter of Intent (Otherwise Known as the LOI)

• • The LOI in some cases is described as a formality so as to move a potential transaction along into the due diligence phase. Nevertheless, one should not underestimate the importance of a well negotiated, comprehensive and professionally written LOI. We recommend presenting the buyer with an LOI that has the following details included at a minimum:

1. 1. 1. The purchase price;
      2. Purchase price payment terms;

• Transaction structure (e.g. share purchase or asset purchase, for further details on this please refer to our previous article titled Business Valuation Models – The What and Why

1. Working capital peg including a formula on how to calculate/determine the working capital at the closing date;
2. Indemnification terms and any customary holdback’s;
3. Any future employment terms if the purchaser would like the previous owner to continue working with the company post acquisition; and
4. Suggested closing date.

Due Diligence

• • Due diligence is a comprehensive assessment of a company completed by the purchaser. The main purpose of this key step is for the purchaser to identify any areas of risk within the business. Our top suggestions as it relates to the Due Diligence phase for a purchaser are the following:
    1. The purchaser should set out a due diligence process which will include milestones and deadlines for the seller to follow.
    2. The Purchaser should compile a due diligence request list that includes a wide range of business documents such as financial reports, HR documents/policies, IT organizational chart, patents, trademarks, etc.

• Assemble an experienced due diligence team. This should include an accountant specializing in business acquisitions and a business lawyer who can review any legal agreements currently entered into by selling company.

1. For larger transactions over $5 million in size, the completion of a Quality of Earnings Report (“QOE”) will help to provide greater comfort around the quality of the company’s financial performance and likelihood to continue post acquisition. https://sbpartners.ca/service/business-valuation/quality-of-earnings/
2. Consider completing a higher level due diligence report at a minimum will help to examine points of concerns such as the positive and negative impacts of COVID-19 on the business operations, historical performance, and the optimal level of working capital for the business.

 Financing

• • As the transaction is being planned, another aspect that needs focus early on is the assessment of how best to finance the transaction. Some essential do’s and don’ts when determining the financing terms include:
    1. Getting an understanding of the bank’s appetite for the transaction as early as possible is vital. Not only will this allow the purchaser to assess financing structure but it will also help to minimize potential delays in getting the transaction closed.
    2. Try and get a sense of the vendor’s interest in a vendor take back (i.e. the seller finances a portion of the sale) since the terms may be more friendly and can reduce the reliance on banking debt.

• Preparing a 12 to 24 month cashflow statement for the future operations of the company can provide the purchaser and lender (i.e. bank) with a superior understanding of future cashflow needs.

1. Ensure the financing institution offers an operating line of credit for day to day operations in order to provide an additional working capital cushion early on after the closing of the transaction.
2. Understand the impact of any imposed loan covenants that are included in the bank financing. Loan covenants can sometimes restrict future operations of the business.

Integration

• • M&A transactions will blend different work cultures and personalities and failing to recognize this is a common M&A pitfall. The purchaser must encourage management to create a collaborative culture and one that welcomes the newly acquired company.
  • Each company should take an active role in understanding each other’s culture to help with the integration of the two companies.

These are just a few of our top tips as it relates to entertaining a possible M&A transaction. For more information contact our team and we will help guide you to understand the best approach as it relates to your M&A transaction.