M&A can be a double-edged sword sometimes. While rewarding and fun, it can lead to significant losses and premature baldness.
Here’s my take on Jack Allgood’s (a retired M&A accountant) 7 buy-side pitfalls from the February 2020 COCPA newsletter.
A common theme across all 7 is rushing and not taking time to do due diligence before the LOI (Letter of Intent).
Even if an LOI is non-binding, it’s the same as a marriage proposal in terms of the psychological effects that is has on both sides.
So, you want to make sure that all the right boxes are checked off to ensure a successful acquisition.
Here are the 7 steps to take before an LOI:
- Both sides not understanding and setting a process for the transaction. The earlier that this is done, the better to make sure that efforts aren’t duplicated. Or even worse, that steps that involve tax laws and regulations are skipped.
- Not setting a specific target with specific requirements.
- Why is the target on sale? For how long has it been on the market? Or has it been involved with any failed transactions?
- How complex is the tax/legal structure of the transaction? A council meeting to identify any needed pre-transaction structuring should take place.
- Run background checks on all involved officers and directors.
- Is the market aligned with your acquisition and future exit?
- Signing an LOI without consulting independent tax and legal experts. Success-based fees can be taken advantage of, so there are no excuses. This step will tell you:
- To pursue asset vs. equity.
- How much equity you should give the seller if they are going to continue operating the asset as part of the larger rollup.
- Not conducting complete due diligence.
- Getting an independent tax professional should always be a priority.
- Operational due diligence should outline responsibilities, employee transition, customer transitions, maintaining quality, etc.
- Mis analyzing the quality of earning (Q of E).
- In plain English, are the targets books clean and properly audited.
- Making sure that everything is in order for the desired tax outcome.
- Incorrect calculation of income tax ramifications.
- Laws are binary, so make sure that everything is done in the right sequence.
- Not planning for integration.
- This is the perfect time to put culture integration on paper.
- Setting a timeline for a successful integration.
- What’s your back out plan if the deal goes south (exit agreement)?