The successful completion of a merger and acquisition (M&A) transaction is a complex business that is not achieved easily and a number of hurdles are encountered along the way. The knowledge of M&A obstacles and preventive measures is necessary for entrepreneurs looking to conclude a deal smoothly with as minimum hassles as possible. Five major problems that can ruin any such transaction are being presented here apart from the associated corrective measures that can be used to prevent them.
1. Buyer Unable To Complete Transaction
It can happen sometimes that the buyer or the party that initiated the move to acquire another company may not be able to complete the transaction. This may be caused by a number of reasons like financial losses or the lack of focus by the company in running day to day operations leading to deterioration in the company’s financial situation. Failure of the purchaser to close out a deal can have serious consequences for both the parties with the seller facing a prospect of depreciation of its overall value and the buyer saddled with the possibility of itself getting acquired.
The primary reason that such a problem may occur is an uncompetitive sales process that leads to the selection of an unfit purchasing party. Try to set up a process that leads to the emergence of more than one prospective buyers which can not only be helpful in finalization of most suitable bidder after comparison of all interested parties but also in the increased valuation of the selling entity.
2. Inadequate Due Diligence Process
A lot of transactions are aborted due to problems occurring because of improper due diligence. Acquiring entities usually overestimate the valuation of the target company because of this and realize their mistake midway through the negotiations which lead to a reassessment of their plans. Moreover, a wrong evaluation of the future growth rate and profitability of the target firm may result in a financially detrimental deal. A deficient process even if it does not result in the breakdown of negotiations can lead to a delay in the realization of the project which will be damaging for both sides.
Proper maintenance and updating of all relevant records like account ledgers and board or stockholder meetings and resolutions, should be second nature for every commercial organization so that when the due diligence proceedings are conducted, no discrepancies can be found. Companies must also hire consummate professionals who go through every detail meticulously so that the process can be conducted smoothly.
3. Incomplete/Incorrect Disclosure Schedule
This is one of the most important entries in our list of M&A obstacles and preventive measures as it refers to the disclosure schedule which is a document prepared by the seller containing information about intellectual property, employees, major contracts, litigations and other critical aspects. Its importance can be judged from the fact that an incorrect or incomplete disclosure schedule may result in a breach of the agreement and harm the reputation of the organization which is getting acquired.
The selling company must assemble the most appropriate employees who will be responsible for the drafting of this critical document and engage a reputable M&A law firm that can provide vital inputs to the drafting team. The comprehensive nature of the disclosure schedule will require a number of rough drafts before the final paper is composed for negotiations with the acquiring enterprise.
4. Employee Related Issues
A significant part of the workforce of the target company may see the deal as a threat and react negatively. An absence of a concrete plan of action addressing the future of the employees and all other related issues will lead to discontentment among the staff and a high attrition rate. This will be detrimental for the financial health of the future organization as losing personnel that would have added value to the enterprise will be a serious setback.
A sensible decision would be to address the issue right at the time of due diligence by identifying the staff members that the new entity intends to retain and devise a suitable exit plan for those it wants to discard. The management should be transparent with the employees and try to address any concerns that they have at the earliest.
5. Incompetent Team Of Advisors
A number of deals suffer because of the ineptitude of the financial or legal advisors hired by the involved organizations. Companies rely on the skills of financial consultants for the framing of key documents that protect their interests and activities like due diligence which are critical for making the correct assessment of the ground realities. Another mistake that harms the prospects of the transaction is not hiring M&A lawyers and instead choosing corporate attorneys who will not be geared for the job.
It will be pertinent to sign up consultants who specialize in the field and have the experience of successfully overseeing transactions involving reputable entities.
This list of M&A obstacles and preventive measures will be of immense help to all entrepreneurs who want to aim for a larger share of the market and consolidate their business by integrating their organization with another entity.
Amy Jones is a professional legal expert working with Ahlawat & Associates. With a long background of taking up several types of cases, she is able to provide the NRI legal services in India for their clients in a professional manner and help them to solve their complicated legal issues. she keeps writing about different legal matters.