The M&A process: A step-by-step guide

Mergers and acquisitions (M&A) are seen as a shortcut to achieving growth and expansion. While this may be true, it is important to note that in many cases, M&A deals do not make it to completion. The process is often lengthy and complex, meaning a significant number of deals stall or fail to materialise altogether. To help you through the process, we've put together this step-by-step guide of a typical M&A process, which consists of the following steps:

• Develop an M&A strategy
• Set M&A search criteria
• Search potential targets
• Begin acquisition planning
• Perform valuation analysis
• Negotiations
• M&A due diligence
• Purchase and sale contract creation
• Financing
• Closing the deal
• Integration
• Ongoing monitoring

In addition, we will look at

• Buy-side M&A process
• Sell-side M&A process
• Roles and responsibilities in the M&A process

 And how to

• Optimise your M&A process and outcomes with Financials

1. Develop an M&A strategy

Be it buy-side or sell-side, crafting a comprehensive strategy is essential for M&A success. It involves defining the purpose, objectives, and expected results from the transaction. The strategy should take into account various factors such as market conditions, the company’s financial health, and future goals and addresses important questions such as why the M&A is happening, how the process will unfold, and what goals will be achieved.

The strategy forms the foundation of the process, guiding every step and keeping objectives in focus, especially when tough decisions must be made, doubts appear, or deviations occur.

Developing an M&A strategy requires collaboration among senior leadership, corporate development teams, the board, and external advisors.

2. Set M&A search criteria

The next step is to define the criteria for the target company, which helps narrow down potential candidates. Search criteria may include factors such as the size of the company, revenue, industry, geographical presence, culture, and product or service offerings.

The search criteria are shaped by the purpose and objectives outlined in the strategy and the type of M&A planned. Understanding why the transaction is being pursued helps determine which factors to prioritise. For example, if the goal is to expand in the education sector by acquiring a small company, the search can focus on that sector, saving time by eliminating irrelevant options. Additionally, if the focus is on tech solutions, the search can be further narrowed to small tech firms in the education sector.

A profile of the ideal M&A candidate can be created by answering key questions like whether the transaction is a merger or acquisition and the target company’s size. This acts as a preliminary filter to exclude irrelevant options early in the process.

3. Search potential targets

As straightforward as it sounds, this step involves researching and identifying potential targets that fit the search criteria and ideal target profile developed in the previous step. Using market analysis, industry reports, and other methods, compile a long list of potential target companies and begin evaluating and screening them based on available information. During these preliminary assessments, some companies will stand out as more promising candidates than others, helping to further shortlist targets.

4. Begin acquisition planning

This step involves making the first contact (either directly or through an intermediary) with one or more of the identified potential targets, usually limited to one or two, not all. A Letter of Intent (LOI) is generally sent by the buyer to express their interest in a merger or acquisition. This not only starts the conversation but also helps gauge the target's interest and expectations and gather more detailed information.

5. Perform valuation analysis

After the initial contact, if both parties are willing to move forward, the next step is to perform a valuation analysis. For this analysis, the target company provides essential information, particularly regarding its past performance and current financials. Signing a non-disclosure agreement may be required to access this sensitive data.

This information is then analysed using various valuation models, often in combination, to evaluate the target both as a business and as a potential merger or acquisition partner, calculating probable outcomes if the deal goes through.

Comparable company analysis, precedent transaction analysis, Discounted Cash Flow (DCF) analysis, asset-based valuation and earnings multiple are some common valuation methods.

6. Negotiations

After conducting the valuation analysis, a deal is formulated and presented to the target company, thus beginning negotiations. In this phase, the target company might express concerns about the valuation, seek a better price, and discuss other issues regarding the deal and its terms. Essential transaction details and terms like the method, warranties, indemnities, contingencies, timelines, confidentiality, and post-merger integration are negotiated and settled.

This phase is critical for both parties, testing their readiness to compromise and close the deal. As a result, many deals tend to fail during this part of the process.

7. M&A due diligence

A key part of the M&A process, due diligence takes place before the contract is finalised. The aim is to verify the legitimacy of the claims and information provided by the target company.

This step involves a thorough investigation and assessment of every aspect of the business, from finances and operations to legal matters, human resources, infrastructure, assets, liabilities, compliance, customers, and taxes.

It also checks if the companies align culturally, as differences here could create post-merger integration challenges. Due diligence further helps to understand whether the M&A goals can realistically be met.

Overlooking due diligence can have severe consequences, such as financial setbacks, operational difficulties, or legal action. It is a vital step that helps uncover any risks the deal may carry.

8. Purchase and sale contract creation

Once due diligence is complete and all details have been verified without major concerns, the next step is drafting the purchase and sale contract. The involved parties agree on the purchase agreement type, whether asset or stock, and prepare a final draft ready for signing.

This final contract outlines all the terms and conditions agreed upon during negotiations, including the timeline and key dates, any conditions that need to be met before closing, how disputes will be resolved, and any adjustments needed after the deal closes.

9. Financing

Financing is critical to M&A completion and remains a key focus throughout the entire process. The financing strategy may have been developed during the initial stages and it may require final adjustments after the type of purchase agreement is finalised and the final draft of the contract is prepared.

Cash payments, stock purchases or exchanges, and debt financing (such as loans or issuing bonds), or a combination of these methods, are typical funding methods. With the deal signing approaching, it's finally time to execute the financing strategy.

10. Closing the deal

Before signing the agreement, a final review is conducted to confirm that all terms and conditions are fulfilled. All essential regulatory approvals are acquired, and compliance with antitrust laws, securities regulations, corporate laws, and other legal obligations is verified.

The closing process involves signing the final purchase and sale contract by all relevant parties and stakeholders, as well as any necessary ancillary agreements and filings. Payment is made according to the agreement, followed by the transfer of assets or shares as outlined. After ownership is transferred, the transaction is reported in accordance with applicable laws and regulations.

11. Integration

The closing of the deal is not the end of the M&A process. Instead, it marks the beginning of the integration phase, designed to realise synergies and achieve the intended goals and objectives behind the deal.

By the time the deal is complete, the post-merger integration (PMI) and change management strategy are typically already in place. These plans, developed collaboratively by stakeholders from both companies, outline how resources, operations, finances, personnel, and organisational structures will be merged, along with the new roles and responsibilities.

The integration phase is about bringing the two companies together as one operational unit, not just by combining assets but by aligning operations, systems, processes, branding, growth strategies, customers, employees, and overall culture. This phase is often the most challenging part of the M&A, requiring collaboration across all levels. It is an ongoing process that requires continuous monitoring and adjustments based on feedback and changing circumstances.

12. Ongoing monitoring

The M&A requires continuous oversight to ensure its goals and objectives are met. Monitoring key aspects like performance, cultural integration, synergy realisation, and financial metrics is crucial in assessing whether the merger is on track for success.

Feedback mechanisms should be implemented, and strategic adjustments made when necessary to realign efforts and ensure the M&A stays on course to achieve its desired outcomes.

Buy-side M&A process

The buy-side M&A process is largely same as the general process outlined above and requires the acquiring company to:

1. Craft an acquisition strategy that defines the purpose, goals, and objectives behind the acquisition and outline how this will be achieved.
2. Define search criteria based on the objectives and the acquisition strategy.
3. Identify and compile a list of potential targets based on the defined criteria. Screen and prioritise potential candidates by doing a preliminary evaluation and elimination.
4. Start acquisition planning by sending an LOI, thus expressing interest in acquiring the business and requesting more information.
5. Carry out valuation analysis on the available information, assessing the business's value and potential outcomes of the deal.
6. Propose a deal based on the valuation and negotiate with the target to reach an agreement on the value and other terms and conditions.
7. Conduct thorough due diligence to safeguard the company from potential challenges. This involves assessing all aspects of the target company to see if it is a good fit and verifying the authenticity of the information.
8. Finalise the purchase agreement type and draft the final purchase and sale contract.
9. Finalise and implement the financing strategy.
10. Close the deal by signing the final contract and completing other legal and regulatory formalities.
11. Develop and implement a post-acquisition integration strategy.

Sell-side M&A process

The sell-side M&A process differs to some extent from the general process and typically involves:

1. Developing a sales strategy that will guide the process. This outlines the motive and objectives behind the sale and includes details such as the expected price, ideal buyer profile, and any terms or conditions.
2. Assessing the company's financial performance, operations, and market position, and addressing potential challenges that could deter buyers. External advisors or investment bankers may be involved at this stage to facilitate the process.
3. Creating an information memorandum, highlighting important aspects such as the company’s financials, market standing, and products or services offered.
4. Performing valuation analysis to determine fair market value. This serves as a strong basis for negotiating a better price with potential buyers.
5. Identifying and shortlisting potential buyers based on the sales strategy and ideal buyer profile.
6. Initiating contact with potential buyers, either directly or through advisors. If interested, buyers receive the information memorandum and other marketing materials. At this stage, a process letter may be issued to outline the steps and timeline for the bidding process.
7. If a buyer shows interest, they conduct their own valuation and due diligence before submitting a bid and LOI. Sellers often seek multiple offers and engage with potential buyers to understand their intentions and offers.
8. The next step is negotiations with interested buyers, where sellers outline their expectations, terms, and conditions to maximise the deal's value.
9. Due diligence follows as a critical phase. Sellers aid the buyer in their evaluation and may also carry out their own due diligence, investigating the buyer to identify any possible risks.
10. Post due diligence, both parties agree on the final purchase agreement, outlining the terms of the sale, price, payment plan, and any contingencies. The final deal draft is then prepared according to these terms.
11. The seller is then required to enter into an exclusivity agreement with the buyer, refraining from further negotiations or considering other offers.
12. With the approval from the board, the final agreement is signed. The deal is closed with the transfer of ownership and the fulfilment of legal and regulatory requirements.
13. If stipulated in the agreement, the seller may need to assist in the post-transaction integration process to ensure a smooth handover to the new owner.

Buy-side vs sell-side M&A process

Roles and responsibilities in the M&A process

The M&A process is complex and requires contributions and coordination from various departments. Key players include:

• Corporate development team: Responsible for researching and identifying potential partners and target companies, conducting initial due diligence, evaluating top candidates, and presenting their strategic benefits.
• Finance team: Critical for executing the M&A, the finance team handles key tasks such as analysing financial documents, performing valuation analysis, forecasting outcomes, and working out the deal’s financing. Their role continues post-transaction, monitoring performance through financial metrics and measuring the deal's success.
• CFO: Leading the finance team, the CFO plays an equally important role. The CFO ensures all tasks performed by the finance team are accurate and report the findings to the CEO and other stakeholders.
• External advisors: External advisors, investment banks, and consultants are experts in the field and can simplify key tasks such as valuation, due diligence, negotiations, regulatory compliance, and deal structuring. They provide objective, data-driven insights, ensuring the process remains unbiased.
• Legal team: The M&A process includes legal tasks like due diligence, contract drafting, and compliance. Given that errors can lead to serious issues, these tasks are essential, highlighting the legal team’s crucial role and the potential involvement of external legal agencies for assistance.
• HR: The HR team is vital in post-merger integration and addressing employee challenges arising from a merger or acquisition. They assess cultural fit and plan for workforce assimilation while managing talent retention issues that may arise after the transaction.
• Executive leadership: The leadership team collaboratively plans and executes the M&A, establishing strategies, goals, and objectives, making vital decisions, and overseeing integration and communication.
• CEO: The CEO, as the primary decision-maker, assesses reports and stakeholder insights prior to finalising the deal.

Various teams, including operations, IT, and marketing, participate in the process by evaluating compatibility, assessing risks, and planning integration from their viewpoints.

Optimise your M&A process and outcomes with Financials

As key players in the M&A process, finance teams will find significant value in Financials. This financial management solution is designed to empower finance teams, allowing them to manage every aspect of financial accounting from one platform. It automates routine tasks and provides real-time business insights, allowing your team to prioritise growth and strategy over everyday tasks.

The software supports robust financial analysis, including planning, budgeting, and forecasting, which are essential components when pursuing a merger or acquisition. With customisable dashboards and real-time data capabilities, all stakeholders can easily track key financial metrics and performance.

Our financial management solution is here to support you throughout the entire process, from strategy planning to post-transaction monitoring and measuring success.

FAQ

What is M&A lifecycle?

The M&A lifecycle represent the entire process of executing a merger or acquisition, encompassing strategy development, target identification, due diligence, negotiations, deal closing, and post-transaction integration.

What is an M&A process letter?

An M&A process letter is a detailed document comprising key information including all the steps and procedures, timelines, instructions for due diligence, key terms, and other requirements for submitting bids and proceeding with the transaction. It is also known as a bid process letter and is shared with potential buyers.

What is due diligence in mergers and acquisitions?

Due diligence is a crucial step in mergers and acquisitions whereby the target company is thoroughly investigated and evaluated. It aims to verify information and uncover any potential challenges. It involves reviewing financial statements, legal documents, operational data, and additional relevant information to assess the company’s value and overall suitability before closing the deal.

What is the timeline for M&A transactions?

M&A transactions have no fixed timeline and can take from a few months to over a year, sometimes even several years. How long an M&A process takes varies depending on the complexity of the deal and the parties involved.