We all know the world is in a very different place from what it was 6 months ago and we have all heard the phrase “unprecedented” but what has that meant for Mergers and Acquisitions?
The top end of the M&A market ($7B+ deals) has virtually fallen to zero but what about SMEs?
I have been helping entrepreneurs buy and sell businesses for over 15 years and despite Covid-19 deals are still being done. At the time of writing, I am in the throes of a completion to an international acquirer who made their offer to acquire in March.
When the word recession is used, we all like to think about 2008/2009: why is this time different?
In 2008/2009, the shock was financial, this time it’s structural and money seems to be cheap. The latter allows more scope for transactions to be undertaken.
M&A is in part a psychological and emotional journey.
Once the decision to sell or buy has been taken then that sets off a chain reaction, which means that commitment takes the front stage of a transaction (who wants to be the buyer that has to report to its board that resources have been wasted? Who wants to be the seller who when envisioning retirement has to be back at their desk on Monday morning?).
The main reason (ignoring Covid-19) that deals do not complete? Follow the money.
If a transaction loses its financing then that risks deal failure or if the terms of a transaction are altered to the detriment of one party this also sets off a psychological chain reaction because of a loss of consistency.
M&A has had a Darwinian type experience. The spectre of a possible recession has meant that the strongest sectors have survived and in fact, thrived.
The shining star of M&A has been technology.
Notably, cyber-security has particularly bucked the trend as we all begin to work from mobile devices a lot more than we used to and create more connectivity in our business and personal lives.
Businesses that run data centres are equally of interest as the more we move to a technological focussed world, the more data centres are needed to manage the flow of the data that we are all consuming.
Now that the stars of the M&A world have been revealed, what is the process involved in buying or selling a business?
(or to use a latin phrase that’s been around longer than the number of businesses I have helped clients to buy and sell…caveat emptor (I will forget it by the end of the article too)).
Why should a buyer beware?
Only one piece of paper is really needed to transfer a company’s shares (and even then it’s probably freely available on the internet).
So, why do you need to speak with someone like me?
If you are buying a company then you will want the investment you are making to be protected and this can only be achieved by entering into a sale and purchase agreement; the key part of this document is the warranties.
The warranties are promises made by the seller(s) about the state and condition of the company up to and on the day you buy that company.
It’s like buying a car with a certain number of miles and if after buying it, there are more miles on the odometer, you would want some of your money back wouldn’t you?
If you are selling a company (and realising the fruits of your labour) then how can you protect the cash that goes into your pocket?
The key process is disclosure: this is where you let the buyer know of any relevant facts or circumstances.
So if you have told the buyer that the clutch on the car is faulty then you should not have to give any money back….
So why buyer beware? If you use the one piece of paper that I referred to earlier then the warranty protection will not exist and the car will be yours without a right to ask for money back if the mileage is not what was promised.
The threat of recession should never mean that a more relaxed view on due diligence should be taken in the hope of a lower purchase price.
Due diligence should even more be front and centre if you are thinking about buying a business- should you now defer some of the purchase price on the basis that the effect of Covid-19 has had an uncertain effect on the forecast figures of your target company?
There are other areas that you will want to think about but this article will not give away all the secrets….
Guvvy Sandhu is a corporate lawyer and has been helping business owners buy and sell businesses for 15 years.