Sometimes the concept of two entities coming together as relative equals in a merger is hard for business owners to embrace particularly after each has been a founding entrepreneur for a number of years.
What will be the business model? Will the new entity be a partnership structure? Or a corporation? These are fairly fundamental issues that need to be decided sooner rather than later, since each principal will have certain expectations, and those may evolve as the discussions mature. High on everyones list of questions in any potential transaction is: What is the price or value given to my business? But the more important question is: What are the terms?
In a merger, 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.
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It is likely 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.
In addition, another consideration 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?
Long process
Remember, this all takes time. How long? On average, 9-12 months. 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.
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Lets not forget the people side of this matter. 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?
If everything works out as planned, the business will thrive and all parties will derive financial 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? Giving some thought to how to deal with a clear lack of success is just 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, plan for the worst, and the likelihood is that reality will be somewhere in between.
Kwicien is managing partner at Baltimore-based consulting and advisory services firm Daymark Advisors. Reach him at jkwicien@daymarkadvisors.com.
