Jeremy Gray – 5 Introduction to Mergers and Acquisitions
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Over the next four shows I will provide a guide on how you can manage an M&A project from start to finish. And M&A does not end with the signing of the Purchase and Sale agreement. In fact that is when the work really starts.
Show Objectives - The Why
Let’s start on our journey towards your first and profitable acquisition, the acquisition that will propel your business to the next stage. It's not easy but not many actions can double your business size overnight but an acquisition can.
Key Issues - Owner Perspective:
Is M&A a risk? Or an opportunity? The answer is of course that it is both, any business decision carries an element of risk. You are an entrepreneur, you took a risk when you started your business. There was no guarantee of success but you did succeed.
What I hope to do is enable you to minimize the risk and maximize the opportunity. I know that sounds trite or cliched a bit like the advice to buy low and sell high. But with a good understanding of the possible risks and excellent planning you will maximize the ROI on your investment.
What You Need to Know - The What
You are likely and justifiably nervous of M&A. Stories of megamergers that fail are common and well known. During the show we will look at a few to see what we might learn from these disasters. It's also fun to remember that these mergers were planned by supposedly smart folks being a paid a lot of money
What You Need to Do - The How
There are two common ways to acquire a company, you can buy the shares or you can buy the assets. What are the advantages and disadvantages of each method?
A share deal is generally less complex. You take ownership of the company, its assets and liabilities, all its contracts for example all employee contracts remain in place, there are no contracts that need to be assigned to the new owners. To suppliers and customers the acquisition is more transparent, not a lot changes from their perspective they are still dealing with the same people, paying into the same bank accounts etc.
In an asset deal in contrast as the name implies you buy the assets including the customer lists but every contract has to be assigned to the new owners. Every employee has to sign a new employment contract, every customer under contract has to agree to transfer the sales contract to the new owner, any assets owned or used under a leasing contract also need to be changed, yes even down to the photocopier lease.
So if an asset deal is so much more complicated why would any buyer consider an asset deal. The reason lies in my earlier description of a share deal by buying the shares you take ownership of all the assets and all the liabilities. All the liabilities, you will be liable for all outstanding claims, all future claims any legal penalties etc against the company from the day it started.
I have done both share and asset deals and the decision on which is better is based on what is referred to as the length of the tail. This is not the length of the tail on the site dog but how long will it take for any liabilities to become apparent. You should also factor in the potential cost of any liabilities.
A couple of contrasting examples that may make this a little clearer. Assume your target is a construction company that has completed many major infrastructure projects. It could be many years before an culpable error is detected on say a bridge and the penalties could be significant, hundreds of millions of dollars. If on the other hand your target is a chain of convenience stores any liabilities should become apparent in a short time. And probably will not be significant in terms of cost. For the construction company I would recommend an asset deal, for the convenience stores a share deal would make sense.
NEXT WEEK’S SHOW
Next week’s show will focus on target selection, finding the ideal fit with your business. This is key to success. Work done now will return your efforts many fold down the M&A path.
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