It’s easy to be flattered by the initial advances of a potential merger partner. But allowing heart to rule head before giving an initial approach proper consideration can mean wasting time and money on a merger or acquisition that is destined to fail. So how do you understand whether the other side is a good fit for your firm?
Get to know your suitor
Take advantage of publicly available information, including records at Companies House or insights in blogs. Ask your contacts in the industry discreet questions.
Speak to your advisors such as accountants. Their corporate finance team will have market intelligence and databases of past transactions, to get an insight into the other party’s track record and credibility in deal-making. Two firms new to mergers may well fail. And even those firms that advise on corporate transactions themselves should probably caution against becoming their own advisers.
Find out what the other party expects from you. Is it a serious or speculative pursuit? How much homework have they done to get to know your business?
Understand what the other side is looking to achieve. Perhaps a merger will be a means to scale-up internationally. It might be part of a strategy to bring additional service lines or specific expertise under their umbrella – understanding the objectives of the other party will help assess whether they will be a good fit for you.
Ask what makes you the right merger partner and a good fit. Do you complement one another in terms of service, sector or geography or will you broaden the offering as a combined entity?
Manage the internal impact on your firm
As far as is permitted, communicate well with your fellow partners – your human capital – so they are on side and aligned with the plan. Some partners are likely to remain with the enlarged firm going forwards, so having them “on board” is essential.
However guard against assigning your most senior people to the deal as client work and, therefore, profitability could suffer.
Ensure you can stand up to rigorous due diligence. Are your work-in-progress and revenue recognition policies sufficiently robust for when the numbers are analysed in more detail?
Head over heart
If a deal looks too good to be true at the outset, it probably is. Once you delve into the ‘nitty gritty’ of facts and financials, the transaction might not look so attractive or deliverable.
Let gut instinct have a say. If you do not get a clear vision on how the deal might work; if the numbers appear far-fetched; if the offer to buy comes out of the blue and there seems to be no clear rationale, then proceed with caution as this may not be the deal for you.
Ways to spot a timewaster
- Misunderstandings about what your business does;
- Failure to ask the right questions;
- Rash or unrealistic promises on timeline, strategy, etc.;
- Continually cancelling or rearranging meetings - how important is this to them?;
- Uncertainty about funding the transaction;
- No advisers;
- Lack of deal history;
- Reputation for speaking to lots of parties; and
- Leaks that could endanger your reputation and your employees’ loyalty.
A deal done well
An international legal firm sought to acquire a UK-based regional law practice. It approached with a clear vision and after initial focussed discussions quickly formulated a robust plan as to how it would make the acquisition a success; including branding, streamlining and improving systems and processes.
This professional approach of having a well thought through strategy, regular and open communication, and the little details such as contingency plans for managing leaks gave confidence to the target.
This thoroughness meant that due diligence confirmed what the buyer already knew about the firm, rather than raising more questions and uncertainty.
As part of its appraisal, the international firm invested in understanding its target partner but was also prepared to walk away if the deal did not stack up financially or commercially.
So far, the merger is going well, with a number of the UK partners retained to head up the new entity and drive it forward.
Considering a move? Click here to download our infographic on ‘Questions to ask yourself before you merge’.