1. Determine purpose

The foundation of any successful deal begins with clearly identifying the purpose and motive behind the transaction. By addressing key questions – such as the rationale for the deal and the expectations of the involved stakeholders (ie, what does success look like?) – you can outline the transaction’s framework.

2. Prepare the company for sale

There is no question that we are currently living through globally volatile times both politically and economically. Preparing the company in case of a wish to sell is crucial because it not only minimises the inherent risks but also maximises value and smooths up the mergers and acquisitions (M&A) process.

A company ready for sale is characterised by a clear and organised financial administration, a healthy level of working capital, the ability to provide insight into legal aspects, and independence from management, key personnel, customers or suppliers. During the preparation process, potential risks can be identified and solutions to mitigate these risks can be developed.

3. Learn from experience and seek expert advice

Learning from past experiences will always help in identify successful strategies and avoid previous mistakes. For example, companies and M&A consultants can refine due diligence processes and improve integration strategies.

M&A is a specialist area where experience plays a crucial role. These processes can be time-consuming: a lead time of six to 12 months is not unusual. It can be an emotional process for entrepreneurs who typically encounter these only once in their lifetime while they still need to manage their business operations. Engaging M&A consultants is essential to navigate through the process smoothly.

4. Secure financing early

Attracting bank funding can be a time-consuming process. Securing financing early speeds up the deal process, demonstrates willingness to the seller which builds trust and avoids unexpected delays or insecurity around the closing.

5. Keep an eye on the finer details

It is easy to overlook some of the more simple tasks such as visiting a prospective site and evaluating a company’s culture.

Conducting a site visit before submitting a non-binding offer (NBO) provides valuable insights which are invisible on paper. It provides a deeper understanding of the target’s operations, culture, assets and operational efficiency.

Each company has its own culture which can vary widely between a target and acquirer. Keep this in mind when considering an acquisition.

Poorly executed integration post-acquisition can lead to loss of synergies and value. Be sure to develop an integration plan to make sure this doesn’t happen.

Once an agreement is reached, there is usually a lot that needs to be taken care of before the closing can take place. To ensure a smooth and efficient process, a comprehensive to do list which outlines the necessary steps is crucial. Specify who’s in charge of each activity and when it is due. This helps to track progress and avoids last minute issues or delays.

6. Be realistic in forecasts

Providing overly optimistic forecasts from a sell-side perspective can backfire if year-to-date performance turns out to be significantly lower than the outlined expectations. It reduces buyers’ confidence, triggers renegotiation and lowers the success rate of the deal.

7. Be conservative when estimating synergies

Synergies are often one of the key drivers of M&A but can be difficult to achieve. Overestimating synergies may lead to overpaying for the target, which puts pressure on future cash flows. Conservative estimates reduce the risk of disappointment and protects the acquirer from financial and reputational damage.

8. Conduct thorough due diligence

Conducting due diligence is a fundamental tool for accessing potential issues and risks associated with the target. Potential issues and risks are often hidden, and further analysis is essential to uncover them.

Nowadays, due diligence must go beyond just financial, fiscal and legal aspects because a company’s success is influenced by more factors. Think for example about the IT environment, and ESG practices being undertaken.

9. Structure the deal carefully

The structure of the deal is important due to its implications on tax and legal aspects such as taxation on the purchase price, warranties and indemnities, and transfer of ownership assets and liabilities. Thus, it plays a pivotal to role in minimising risk to buyer and seller.

An important aspect of deal structure is the effective date as it determines when economic and legal risks and benefits transfer from seller to buyer. Effective date can be based on a locked box mechanism in which the purchase price is based on a past financial statement (the locked box date), from which the buyer gains control from that date. This provides certainty and is practical.

Usually, a seller wants to receive an interest payment for the period between the effective date and closing date. It can also be based on the closing accounts in which the price is based on the company’s actual financial position at the time of the closing.

This reflects a more accurate view of the position around the time of the closing but is more uncertain and less practical since (audited) financial statements are usually not available.

10. Be comprehensive and specific in the LOI

The letter of intent (LOI) outlines the key deal terms, expectations and commitments of both parties. The LOI is about more than just the price, the conditions under which it applies are just as important.

A comprehensive and clear LOI sets the foundation for the remaining deal process, avoids misunderstanding, improves the efficiency of the due diligence and provides a framework for negotiations after the due diligence. Both parties can rely on this document if ambiguity arises, thus protecting both parties.

About the authors

Eyad Farsakh is Middle East regional director, Kreston Global corporate finance group and managing partner at Kreston Awni Farsakh & Co, UAE, and Ward Rentenaar is a senior associate, corporate finance at Kreston Lentink, Netherlands