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April 27th 2021

Mergers & acquisitions - an overview of the process

Mergers and acquisitions can be a viable growth option, even for smaller businesses. What's the process?

1. Strategy

Like most things in business, it's important to approach the topic with a cool head and a clear idea of what you're aiming to achieve with any acquisition or merger.

You need to determine what you wish to achieve and have clear criteria for the kind of target company you want to acquire. Those criteria could be framed in several ways, for example by customer profile, geography, or any number of other factors - it really depends what you want to get out of the deal.

2. Search

Having determined your rationale and target criteria, you may then have to go out and find potential matches (unless perhaps you already have a target in mind). Depending on your sector and your preference, you might engage a broker or other professional to assist with the search and make initial approaches.

3. Initial dialogue

Once you have identified one or more suitable targets, you would typically hold initial discussions to establish if there is a potential match. If those discussions go well, the parties then enter into confidentiality agreement to protect commercially sensitive information that may subsequently be shared as the negotiations continue.

A period of exclusivity may also be agreed at this point, enabling you to continue the negotiations without the risk that the target may be speaking to other suitors at the same time.

4. Valuation

The target would at this point provide you with more detailed financial and other information, enabling you to form a judgement about the value of the business.

Getting the valuation right is crucial - pay too much, and your business will suffer. We are able to assist with valuations of smaller target companies.

5. Negotiation

As the prospective buyer, you would then present your offer and the parties would then negotiate the terms in more detail. Once outline terms have been agreed, they are documented in the "heads of terms" which are not legally binding but provide a documented summary of what the parties have provisionally agreed.

6. Due diligence

Having agreed the heads of terms, you would then conduct full due diligence - this is a very detailed and extensive examination of the target business, designed to confirm (or amend) your assessment of the value of the target business.

Due diligence will cover all aspects of the target business - not just finance but human resources, legal aspects, customers and suppliers, a wide range of issues. It's important to get it right - this is the time to spot any unexpected problems so they can be factored into any deal that might ultimately be struck.

7. Finance

You, as the buyer, will need to establish any finance requirements to fund the deal and make sure finance is in place at the appropriate point, normally before completion if any money is changing hands at that point. Scholes CA has lots of experience in helping businesses fund acquisitions, including putting together financial projections to support funding requests.

8. Business/ share purchase agreement

Assuming the due diligence reveals no major issues, the parties will confirm the terms of the deal (whether that involves a purchase of the business assets, or the shares in the target company) and execute the final contract for sale which is the main legally binding document for the deal. Tax can have a major bearing on the structure of the deal so it's important to get advice from a qualified accountant on this point - again we can assist with this.

9. Closing and integration

Once the deal closes and the business is acquired, the hard work of integrating the businesses really starts. That's a topic for another day.

If you're interested in discussing how Scholes CA can help you to grow your business through m&a, contact us today. Or visit us at our Edinburgh or Kirkwall office.

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