Mergers and Acquisitions, or M&A is becoming more and more common in our modern world. Today, businesses of all types are formed on a daily basis and unfortunately, only a fraction of those business entities will last beyond their first year. M&R is a way for business to remain, but under the cover of a larger company. During M&A contracts, the smaller company loses its original identity and becomes a part of the larger entity. Even though M&R is more common than ever before, there remains a lot to understand, so we will explain M&A legals, costs, and their impact.
Legals Involved with M&A
Legal issues surrounding M&A agreements can be tremendous depending on the size and scope of the overall deal. Careful planning and due diligence into the financials of the deal are critical and when contending with such complicated matters, it is essential that you employ the services of a qualified attorney on both sides to ensure both companies interests remain intact. Purchase and sales agreements must be drawn up as well, but a quality acquiring company will also want to include these three entities…
Deal Structure – The structure of the deal should be laid out carefully including stock purchases, asset purchases, and various other aspects of the legal agreement.
Equity and Cash – How the transaction will be paid for is a vital piece of information and should include what parts are to be paid for in cash and which should be paid out in equity.
Working Capital Adjustments – A part of the purchase price in any M&A is working capital adjustments. These include the purchase price, any debt collections or leans against the company, and any delayed inventory purchases that could impact the merger.
Costs with M&A
M&A deals are not free, but is an essential part of growing a company and helping out the little guy, so to speak in certain situations. Initially, you might be under the impression that M&A agreements merely require a few signatures and an initial payment to be made or the whole cost to be awarded at the end of signing the deal. However, like all larger transactions, hidden and one off costs can often take companies by surprise. Here are just some of the costs you need to consider before signing on the dotted line or even lining up a company you wish to acquire.
An advisor fee is one that you may or may not have to pay depending on the type of M&A you are involved in. In the instance you have to pay this fee, it will cost anywhere from 10% to 12% for a deal of $5 million or less while those worth $25 million or more assess a fee of between 2% and 4%, so the larger the acquisition, the smaller your advisor fee.
Deal Related Costs
These costs are those that you incur throughout the process. They include travel expenses, meals or gifts for winning the client over, and anything else you put into the process while formulating the deal.
Legal fees are always a problem with M&A deals, but they can be drastically reduced if you use an in house legal team.
Sometimes even with careful planning, a deal can fall through during the later stages. Breakage fees are essentially a deposit for the business and it can be anywhere from 5% to 10% of the total cost. It can be an unnecessary cost, but is still often essential to ensure the business transaction is held in good faith throughout the process.
Integration Advisory Fees
Integrating the new business with the company can costs money and often an advisor is an essential part of the process. They can help iron out details and make the transition easier in the following 12 to 24 months after the M&A is completed.
Some of the most important costs in business are those that remain hidden. These costs include turnover rate and knowing the right people for the job. HR costs are essential in M&A deals.
IT and Technology
These costs are essential in our modern world as access to IT files of the company to be acquired are essential. This fee is another way to show the business you are serious about the merger or acquisition. It also helps give your company access to important parts of the new business.
When you acquire a new business, often that transaction comes with a certain amount of debt. This debt can be minor or major and may take years to completely alleviate.
Costs of Rebranding
You will ultimately, have to rebrand the new business. Your brand is the dominant factor in the transaction and therefore, it must be reiterated to the new company. Signs, banners, painting, building upgrades, and anything else that falls in line with your brand will have to be addressed.
M&A Overall Impact
M&As are essential for growth and just like any other aspect of business, what affects one part, will ultimately have an affect on others. M&As may seem as though they are only impacting those involved in the transaction, but you have to remember, when you are intent on acquiring a company for any reason, you are acquiring the whole thing. This includes employees most of all and the thought of new owners coming into their business can make some employees nervous. Employees must be made aware and in the loop during transactions to help curb certain feelings of leaving. These are the employees that made the business successful enough for you to want it, so that deserves your respect.
Another impact an M&A can have is on the community surrounding it. Many small businesses are important parts of their community. They may provide charity work or sponsor certain events throughout that community. These, too need to be taken into account. The community in which the business is involved in will be your customers once the M&R is complete, so you will want to keep those relationships intact as much as possible.
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We would love have a chat to see how we can add value to your M&A or fundraising projects for lenders/investors or for borrowers/investees, please reach out to us here if you'd like to do.