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Mergers and acquisitions (M&A) are complex transactions that require careful negotiation and due diligence. Negotiating for M&A involves a variety of considerations, including valuation, deal structure, financing, legal and regulatory compliance and post-merger integration.
Let’s explore some key strategies and best practices for negotiating successful M&A deals.
1. Conduct thorough due diligence
Before entering into any negotiation, conducting thorough due diligence on the target company is essential. Due diligence helps to identify potential risks and opportunities associated with the acquisition, including financial and operational risks, legal and regulatory compliance issues, intellectual property rights and customer and supplier relationships. This information is critical to determining the target company’s value and identifying any deal breakers.
For example:
- You’ll want to clearly understand and have documentation substantiating the capitalization of the target. The last thing you want is for an unknown stockholder to come out of the woodwork after the deal closes.
- You want to ensure the target owns all of its intellectual property (or has sufficient license rights, as applicable) and there are no major risks of infringement claims against the target.
- Has the target been involved in litigation? Or is someone threatening litigation?
2. Determine the deal structure
The deal structure refers to how the acquisition will be financed and structured. The most common types of deal structures include stock purchases, asset purchases and mergers. Each structure has different legal and tax implications, and it is important to consult with legal and financial advisors to determine the most advantageous structure for the deal.
Related: We Can’t Rely on Venture Capital Funding to Build a Just and Thriving Entrepreneurial Economy. Here’s What to Do Instead
3. Set realistic valuation expectations
One of the most challenging aspects of negotiating an M&A deal is determining the value of the target company. Both the buyer and the seller will have different valuation expectations based on their respective financial models and industry market conditions.
To reach a successful negotiation, both parties must be willing to compromise and adjust their valuation expectations. Having a thorough understanding of the target company’s financials, market position and growth potential is essential to developing a realistic valuation.
4. Establish clear goals and objectives
Successful negotiations require clear goals and objectives. Both parties should identify their respective priorities and interests as well as their areas of flexibility and non-negotiables. The parties should work together to develop a mutually beneficial agreement that satisfies their respective goals and objectives.
For example:
- Both the buyer and target need to decide how important risk mitigation is to them. A risk-averse buyer will want tight indemnification rights for future liabilities arising from issues with the target. A risk-averse target will want less onerous indemnification obligations and low caps on such obligations. If the target is more willing to take risks, they may agree to buyer-friendly indemnification terms in favor of some other ask on other terms.
- Some deals are a mix of cash and stock — which gets more complicated if the buyer is a private company. In such deals, as the target, you need to decide what you care about more — cash or stock. If you value one more than the other, where certain consideration is contingent, you will want the consideration you value more not to be subject to as many contingencies.
- If the deal has earnouts, as a target, you will want to negotiate protections. For example, if the earnout requires specific revenue goals post-acquisition, what if the buyer stops selling your product/service? Or stops putting resources into it? There are deal terms that would protect you in such events. As a buyer, on the other hand, how much do you want your hands tied to help the target receive earnouts? You want as much freedom as possible.
Related: 7 Deadly Sins of Merger and Acquisition Negotiations
5. Develop a negotiation strategy
Developing a negotiation strategy is critical to achieving a successful M&A deal. The parties should identify their respective bargaining strengths and weaknesses, as well as the potential risks and opportunities associated with the deal. As discussed in our last article on negotiations, it’s paramount to identify an alternative to the agreement if it cannot be reached.
The parties should also consider the timing and sequencing of negotiations, the use of concessions and trade-offs and the importance of maintaining good working relationships throughout the negotiation process. From a timing perspective, it often makes sense to get big-ticket items out of the way early so that no one wastes their time on details when no deal is possible.
In addition, using advisors like lawyers and bankers to do a lot of the negotiating can help preserve relationships. Let your lawyer play bad cop for a while, and you can swoop in at the end. This mitigates the harm from you as the principal having fights over the entire process.
6. Focus on post-merger integration
The success of post-merger integration often determines the success of an M&A deal. A comprehensive integration plan developed by both parties should address key issues such as culture, leadership, communication, technology and operations. The parties should also consider successfully retaining key employees, maintaining customer relationships and ensuring a smooth transition for all stakeholders.
From an employee perspective, this can take different forms. Sometimes you can negotiate re-vesting of deal consideration for some key employees, which requires them to stay employed for some time post-acquisition. Also, non-compete agreements, common in M&A, can incentivize key employees to remain employed with the buyer post-acquisition.
Those, of course, are “stick” approaches rather than “carrot” approaches. Buyers are often much more well-resourced than their targets. So, higher salaries and bonuses and post-acquisition equity issuances can provide positive incentives to retain employees.
Clear and unified messaging is important for customer and vendor relationships. Providing prompt notice and assurances of continuing dedication to the relationship is often enough. Of course, individual outreach is often recommended for particularly sensitive situations or priority partners/customers.
Related: How to Avoid Post-Merger Identity Crisis
7. Consider alternative dispute resolution mechanisms
In some cases, disputes may arise during the negotiation or implementation of an M&A deal. To avoid costly and time-consuming litigation, the parties should consider alternative dispute resolution mechanisms such as mediation or arbitration. These mechanisms can help to resolve disputes in a timely and cost-effective manner while preserving the relationship between the parties.
Negotiating for M&A requires a strategic approach, which involves complex legal and financial issues requiring specialized expertise. It is essential to seek the advice of experienced legal and financial advisors to navigate these complexities and ensure the deal is structured and executed properly. However, by following these best practices, parties can increase the likelihood of reaching a successful M&A deal that benefits all stakeholders.
