M&A dynamics and being due diligence ready

Many parallels can be drawn between sport and business and, during 2020, such analogies were particularly apt. A number of sporting teams and their coaching staff worked tirelessly in training and preparing for the first game of the season, which ultimately was never played.

In the same way, there were numerous instances of businesses preparing themselves for an M&A transaction, which was upended by the pandemic.

Time management in setting up and closing a deal is always challenging for all involved. In the past 12 months there has been an expectation for businesses to move even faster, and completing more of the due diligence (DD) inquiry remotely than ever before, which presents its own suite of challenges.

For those businesses contemplating or wanting to effect an M&A deal, management and advisory teams had to find ways to work under these new and challenging conditions to become ready for DD and close out the deal. In particular, working from home meant teams were often less able to access necessary information in a timely manner. They also had to accept the virtual world and the fact that they needed to create that all-important rapport virtually.

Businesses also had to find ways to restructure the composition of the deal consideration – for instance, by allocating more to earn out where the risk was assessed to be higher than before and still wanting to transact, or paying more cash upfront where it suited the buyer’s strategic objective. They also had to be more prepared than ever before to put deals on hold, and walk away if necessary.

Even in normal circumstances, becoming DD-ready is no small feat. It requires detailed and advanced planning, with management working through a number of tasks listed on their DD preparedness list.

In our experience, up to 20% – 30% of the items referenced on the DD preparedness list was either not current or simply unavailable for the counter party to review. Therefore, the impact of the omitted information on the eventual transaction value needs to be further quantified and managed.

In addition, the pandemic threw further question marks over the historical data that was available from a comparability perspective. Additional consideration was required relating to supply chains (i.e. increased concentration risk due to a production hub/country being shut down due to the pandemic), the impacts of the evolving government restrictions, government support as well as a review of the business’ risk management strategy. Other areas, such as IT and cybersecurity, also required further scrutiny in the current “COVID normal” environment.

Once the suite of possible issues that could affect the transaction value has been identified and quantified, the team needs to formulate its strategy regarding how these matters are shared with the counter party and managed through the negotiation process.

Based on our experience, it is best to be transparent and realistic regarding how ready the business is for sale. Both the buyers and sellers need to be pragmatic about the transaction value and what the market is prepared to pay. Equally importantly, it is critical that all parties involved are prepared to walk away when the deal doesn’t make sense anymore. This is always true during M&A transactions, but even more the case in the current environment.

Back to my sporting analogy. Sometimes despite all the training the season will not go ahead. However, the training helps the team understand its strengths and weaknesses as it prepares for the next season, and if done properly will always stand them in good stead.

This article was originally published in the 2021 IPO Watch Australia Report