It's now the middle of winter, and the collegiate and professional football seasons have drawn to a close. While the gridiron battlefield is now silent, another one is not - the battle of gridlock in Congress and the courts over health care reform is still going strong, and it's likely to continue for some time.
That's why we all need to plan for the worst and hope for the best, including having contingency plans that contemplate multiple potential scenarios.
Last month, we began addressing reasons to consider a merger or sale of your business. Even if you are not currently actively thinking about merging or selling your business, there is real value in going through the mental exercise of the steps to be considered and the financial and personal ramifications involved. It will force you to think about your business in a new light, and will focus your thinking on optimizing the value of your business during these times of market uncertainty.
In Part 1 of this two-part column last month, we discussed the strategic rationale, potential synergies, post-transaction planning, and the components of market value.
Now, let's look at several other key considerations: the new business model, valuing the businesses, the structure of the deal, the merger timeline, how the merger will affect employees of the merged businesses, and lastly, having a plan in case things don't go as planned.
Business model
The next point you should consider is: Will this be a merger of equals? That is, are both businesses valued equally prior to the intended transaction? Obviously, each business will have its own strengths and weaknesses and business metrics that will affect valuation, but will the two entities come together as relative equals? Sometimes this is a hard concept for business owners to embrace, particularly for a founder.
Alternatively, is one business absorbing the other? Set aside the financial terms for the moment, since the merger could be an all-stock transaction with no money exchanging hands. Going forward, what will be the business model? Will the new entity be a partnership structure? A corporation? Or some variation or hybrid structure?
These are fundamental issues that need to be decided sooner rather than later, since each principal will have certain expectations that may evolve as the discussions mature. This may be a good time to consult with a business adviser, who can provide objective counsel on these matters.
Valuation
High on everyone's list of questions in any potential merger transaction is: What is the price or value given to my business? As we have commented previously, the more important question is: What are the terms of the transaction?
This latter viewpoint applies equally in a potential merger, since the businesses should be valued on a relative basis for the most part, using a consistent approach.
That is, a comparable formula or valuation methodology should be applied to both businesses. And undoubtedly as part of the overall valuation process, certain pluses and minuses will be assigned to each business.
It is likely, as we have said, that some value will be ascribed to some intangibles like growth potential, management strength and expected longevity, and existing competitive advantages, until some reasonable determination of value is agreed upon.
This is where the art of valuing a business is so critical. Ultimately, the adjusted value of each entity as a percentage of the value of the merged entity will determine the ownership percentages of each of the principals in the new larger enterprise. That's why this process is so important.
Structure
Another consideration in discussing merger terms is the deal structure itself. Will this be an all-stock transaction? Will any cash or other valuable consideration be part of the deal for one party or one entire management team?
Will any financing be required? If so, will it be debt financing? Or will an equity partner be simultaneously pursued? Clearly if an additional equity partner is pursued, the transaction just got that much more complicated.
If debt financing is more likely, will it be arranged by one entity and become part of their contribution to the merged business? This will certainly have a bearing on the relative ownership percentages going forward.
Process
In the chart, "Merger steps," we've broken down the process of preparing your business for a potential merger, sourcing potential merger candidates, negotiating the terms and developing a post-transaction integration plan. Failure to address this latter point is the leading reason that mergers ultimately unravel. However, we will address this matter in more detail in a future article.
To frame your expectations about the timeline involved, study the chart, "Merger campaign timeline," on page 48. This provides a realistic approximation of the elapsed time involved in a typical transaction. Can it happen more quickly? Sure. But this requires a deliberate, measured approach and there are other third parties involved as well.
Consequently, manage your expectations about how long it will likely take. For example, consider how often you sell your home and how long that process typically takes from start to finish.
Now put that in context given that your business is likely your largest asset. So if you have the urge to merge, think before you act, but act thoughtfully.
People
Let's not forget the people side of this matter. After all, it's the people that drive the business. Are there financial incentives for key managers to make the post-transaction entity successful? Will staff positions/head counts be eliminated? What are the severance implications? What are the foreseeable problem areas? Be candid and real!
What will be the impact on client/customer retention? On employee retention? Particularly when considering all the personnel issues, remember Murphy's Law: "What can go wrong, will go wrong." And don't forget its corollary, Sullivan's Law: "Murphy was an optimist."
In short, have a plan for dealing with the problems and then work the plan.
Worst case plan
If everything works out as planned, the business will thrive and all parties will derive financial, psychic and personal benefits. But what if despite all the good intentions and well-thought-out plans, the transaction is a failure? How do you unravel the deal? At that point, everyone may be looking for the exit, but there are no marked doors to be found.
So giving some thought to how to deal with a clear lack of success is prudent. Think of it as a couple contemplating marriage and discussing a pre-nuptial agreement. Trying to be logical when emotions are not involved can often save considerable heartache later on.
So expect the best and plan for the worst. The likelihood is that reality will fall somewhere in between.
Reach Kwicien, managing partner at Daymark Advisors, at jkwicien@daymarkadvisors.com.
Merger steps
1| Develop or refine your growth strategy
2| Explore short-term operational improvements
3| Set deal value and structure targets
4| Reach consensus on merger target search criteria
5| Compose "book" and PowerPoint presentation
6| Search and conduct preliminary due diligence on merger candidates
7| Determine combination synergies (deal premium potential)
8| Conference calls and introductory meetings
9| Negotiate terms
10| Review definitive agreements
11| Develop post-transaction integration plan
Copyright Daymark Advisors, LLC 2008. All rights reserved.
