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Succession Resource Group is a boutique succession consulting firm based in the Pacific Northwest, serving clients across the country. SRG was founded by David Grau Jr., MBA in 2012 after nearly a decade of helping advisors with valuation and succession planning. SRG's team of experts leverage their industry expertise, combined with best-in-class resources, to help advisors, agents, and accountants manage the equity in their businesses...

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5 min read

M&A Support: What, When, How, and Why

May 18, 2021 2:53:00 PM

Mergers and acquisitions are team activities. Surgeons don’t go into the operating room without nurses and anesthesiologists. Business owners shouldn’t enter into an agreement to sell or merge their business without M&A support.

To better understand this, consider the various stages of M&A, from inception to closing. It starts as an idea, resulting in some internal soul searching, leading to some business analysis, often followed by a valuation to get a reasonable idea of what the business is worth. That’s all done just to test the market to see if you are ready to find a dance partner.

With either type of arrangement, someone needs to evaluate both company cultures. Decisions must be made about how the deal will be structured, how much cash upfront versus payments over time, and how the taxes can and will be structured to maximize both buyer and seller after tax results. Contracts need to be prepared and reviewed by a legal team. Banks have to sign off on the deal and financial details.

It takes a team to get it all done. The due diligence process alone should have multiple eyes on it. Any legal or financial tasks should be performed by certified professionals who have ample experience. The owners will ultimately sign the deal, but there’s lots of work to be done before that.

When should you look for help with your acquisition or merger?

The “when” stage of seeking M&A support happens after the idea phase of deciding now is the time, but before any other major decisions or conversations have begun.

Once the decision has been made, it’s time to seek out the support to make it happen. Assessing the market value of a company should always be done by a neutral third party. Those who are invested personally may have difficulty being objective, and those who lack the expertise, or may have their own biases, should also be avoided. This includes avoiding internal services that may be provided by a broker-dealer or custodian. These folks do not work for you and have their own priorities, as well as generally lacking the experience and expertise to effectively guide you through each step in the process. Using these internal resources may seem like it could save time and money, but the results are commensurate with the investment; this is not the time or process to try to save money.

Assessing the timing for adding a consulting team is a commonsense exercise. When exactly do you need help with the next step? Large roll-ups or industry aggregators have processes in place for decision making. Sole proprietors often let emotion get in the way. Be wary of falling into that trap.

Understanding the Motive Behind a Merger or Acquisition

Many companies at this stage are still deciding between a merger or a sale, and whether they sell to a large firm or someone just like themselves, just a few decades younger. Which is going to be the right move? This is where hiring a consulting firm is advantageous. Take the time to look at every option, not just the most obvious one.

With a merger, the motivation is typically growth, though after 2020 we’re also seeing companies seeking partners simply to remain competitive. A sale is different. The buyer may be looking for growth, or to establish a new location, or adding new services/expertise they currently lack. The seller wants an exit. Consultants understand both perspectives and can help ensure proper alignment.

Motive is an important key to negotiating a good deal. No one wants to look back post-merger and realize they misread the strategic motives behind combining two companies. Saleswhere motivations are misunderstood result in unnecessary time spent negotiating and often, money lost on one side or the other.

Developing a Transition Strategy for a Merger

Mergers are messy. The assets and liabilities of both firms need to be carefully evaluated. Personnel and cultures will be melded together. Decision making will now be shared. It takes a group of professionals to ensure this all happens correctly, so you’ll need help.

Strategic planning in this area is best handled by professionals who have done it before and done it long enough to know what will work well and what won’t.

Don’t expect this all to happen overnight. There are stages to a transition strategy. An M&A support team will work behind the scenes prior to the merger and then actively inside the business after the deal has been closed. Your job is to ensure cooperation from your people.

What makes a merger successful?

In a perfect world, a merger would be deemed successful only after all parties involved met their goals and got what they wanted. That doesn’t happen in the real world - combining two or more businesses into one will always require compromise. Mergers work when shared objectives are achieved. It takes negotiation to decide what those are and to appropriately prioritize them.

One of the more common shared objectives during merger negotiations is about creating synergies. As cliche as that statement is, there is some truth to it. But, when firms talk about merging and creating synergies, they are usually talking about how combining two smaller firms into one larger firm that can remain competitive as costs rise, that is better equipped to handle compliance issues, that can leverage technology more effectively, and respond to the increased pressure on fees for example. . Decisions need to be made by both parties on exactly how some or all of these goals could be achieved by a merger. Some ideas will be adopted. Others will be rejected.

This is an area where a consultant can act as a guide, sharing his or her experience with what works and then leaving it up to the owners to negotiate and make decisions in private.

The real proof of success comes much later, and it’s not necessarily a story that can be told using dollars and cents. Business operations need to be modified from time to time. If the merger was done successfully, those changes will happen smoothly and gradually over time, the goals will begin to manifest. Mergers are an effective strategy for creating a more sustainable firm that can continue to grow and succeed without the founder(s), but given the time it takes to see the benefits of a merger, this is not an ideal strategy for succession planning purposes unless the parties have at least five years before retirement and are ready to spend the last few years working hard.

How do you determine if a sale is successful?

A sale being deemed a success is based on a variety of factors, with the final sale price and terms being the most obvious measure of success. But, that’s not the only factor to consider. Assuming that money is everyone’s goal is a mistake, one that could cost both buyer and seller.

This is another area where the services of a consultant can come in handy. Their due diligence with the seller may unearth additional reasons for selling, uncover higher priorities, or better understand what the seller wants out of their post-sale life.

It is critical to spend the time and money to get the deal done right the first time. This means making sure all parties have access to the resources and expertise that will allow them to know what questions to ask, and to make every decision with full information. . That’s why employing the services of an M&A support team are so important. It’s a success if both parties walk away satisfied. Skilled negotiators can make that happen.

David Pan

Written by David Pan