Mergers and acquisitions in the current climate can be exciting but daunting at the same time. It is important that businesses assess the risks and rewards of making an acquisition at this juncture.
If the decision is to acquire, these six areas should be considered to minimise your acquisition risk:
Right business model
1. Identify the right acquisition target
The target should be one that provides clear benefits to your business, and enhances shareholder value in the long term with a sustainable business model. An important question to ask is, has COVID-19 had an impact on the business model of the target and does the business model still work post-COVID-19?
2. Conduct extensive due diligence
This includes commercial, financial and legal due diligence. It is important to consider the impact of COVID-19 on businesses; quality of earnings may be adversely affected due to rules and regulations imposed, working capital requirements might be higher and the risk of default of obligations are similarly higher. Diligence should not just focus on the period preceding COVID-19, but include a post-COVID-19 period to assess the impact to the target with representations and warranties similarly considering such impact.
3. Identify the key people in the target business
A business acquired, is only as good as a management team inherited. Ensure key people in the target stay for an appropriate period and consider their roles in the business acquired. It is advisable to have service contracts agreed with the key people of the target.
4. Do not pay beyond the fair value of your target
Take into account the intrinsic value of the business, synergistic benefits and the capacity to fund the acquisition when making an offer. Consider the impact of the current climate on the business and if there is any impact on your valuation of the target. Valuations in December 2019 would have changed significantly given the effects of COVID-19. “A great business at a fair price is superior to a fair business at a great price” – Charlie Munger.
5. Have an integration plan
Realise that no acquisition will ever be seamless. Integration with your business will almost always have teething issues. It is important to have an integration and transition plan in place to manage the change, and mitigate the risk for both your business and value of your acquisition.
6. The right capital structure
Put in place a capital structure that best suits your needs and profile. It is important to structure your acquisition right, which means having the right balance of debt and/or equity. Acquirers can take advantage of borrowings as interest rates have declined to 10-year lows. However, keep your overarching strategy in mind and perform a stress test on your capital structure such that if interest was to rise post-COVID-19, the cash flows generated would still be sufficient to service the obligations.
Buying any business has its challenges but it is critical that the acquisition is part of an overarching strategy which is synergistic to your business. Completing an acquisition in this climate may be daunting, but with the right diligence, valuation and safeguards, you will still be primed to complete your acquisition and emerge from this period stronger.
In the next instalment of our series is "Enhancing Value through Due Diligence".
RSM supports businesses with their merger and acquisition activities, from deal evaluation, financial and tax due diligence, to tax advisory services and even business modelling. If you would like to learn more about how we can support you in this exciting chapter of yours, we would be more than happy to speak to you.
Partner, Corporate Advisory; Head of Transaction and Valuation Advisory
T: +65 6594 7862
Partner, Corporate Advisory
T: +65 6594 7827
Director, Corporate Advisory
T: +65 6594 7887