A successful merger or acquisition starts with a well-thought out strategy and thorough planning. In my experience as a tax advisor, the smoothest transactions have always been those that have been well planned. While no two deals are the same, companies merging or in an acquisition phase have similar issues to work through. Here are my five tips to help with your M&A planning.
1. Start early and plan, plan, plan!
Start your planning and due diligence as soon as the target is identified. I personally have never used the same due diligence list twice as it always needs to be customised. You should ensure your checklist covers all issues that are important to your organisation and your acquisition strategy.
The sooner you get the financials of your target the sooner you can identify the issues to be worked through. For example, if your target is a subsidiary of an Australian tax consolidated group, this generates a whole range of new questions to be included in your checklist.
2. Corral your experts
Your team should, as a minimum, include your accountant, a tax specialist ( if not covered by your accountant), your lawyer and your internal executive or owner/principal driving the transaction.
If yours is a highly specialised, niche or technology business, you may need to bring in a specialist expert. For example, a software company will need a tech expert to perform due diligence on the application code. Larger businesses may need to bring in functional leaders from sales, operations and IT where their expertise is key to realising value.
One person – typically the CEO, CFO – needs to take the lead to set up regular conferences and ensure everyone agrees on the approach. The team needs to be disciplined to ensure meetings occur on schedule and the agreed time frame is pursued, otherwise the transaction will drift on.
3. Centralise your work plan
A centralised workplan which is co-operative and directly linked to the emerging business sale or share transfer agreement is ideal. A ‘virtual data room’ can provide a neutral, secure off-site location for this purpose. It enables members of both parties to look at and share each others business documents securely and collaborate effectively.
4. Understand ‘Share’ vs ‘Business’ sale outcomes
There are two ways you can sell a business in Australia. In a business sale, you choose which assets you are selling to some extent, meaning the original owner may still be responsible for the business’s liabilities. In a share sale, liabilities are sold along with the rest of the business.
Where your target is an SME (Small to Medium Enterprise), the Australian Capital Gains Tax (CGT) system favours selling the shares rather than the business for the seller. If the seller is eligible, there are very generous CGT concessions which can often mean no tax at all is payable by the seller.
Historically, given a choice, the buyer would prefer buying the business, rather than the shares in the company that owns the business, to avoid taking on any unknown liability the company may have that didn’t appear in the due diligence process.
Naturally, the sellers are pushing for share sales instead. As a buyer, there are several strategies for minimising the risk around this course of action, from robust indemnity clauses in the contract to restructuring before or after purchase into a clean skin company.
5. Allow time and resources for good commercial outcomes
M&A transactions typically involve commercial negotiations such as dealing with a landlord for a smooth handover of a lease, negotiating supply contracts with buyers and suppliers, and moving employment agreements including annual and long service leave entitlements. These commercial items are generally the most time consuming, and can be even more complicated if several states are involved. You should not underestimate the amount of time that these commercial activities will take.
Some companies have a specialised executive who manages all mergers and acquisitions but for smaller companies, it often falls to management and/or the local internal accountant to handle. Again, early planning and resourcing is key.