Key considerations and best practice for accelerated M&A

The global COVID-19 pandemic has led to businesses facing significant and unprecedented challenges.  As the lockdown restrictions begin to be relaxed, some businesses may struggle to recover, finding that the damage done to their finances and the daily ongoing struggle to control cash flow is just too much for the business to continue.

Many of those companies will still have viable underlying businesses, but the financial pressure suffered will mean that some restructuring is required. For many business owners, a sale may be the only way to repay creditors and possibly to even recover some value for themselves.

As a result, companies that are financially stressed or distressed, a sale of the company or its business and assets might be the best exit route for its stakeholders. It would seem likely that there will be a corresponding increase in the accelerated sale process, often referred to as an “AMA process” or “distressed M&A process”.

The AMA processes itself often results in a sale of the business and assets, rather than the shares in the company. A large proportion of those sales are effected through an insolvency related sale process (called “pre-pack” administration).

Understandably, from a business owner’s perspective, a distressed sale can be heart breaking and may be driven, at least in part, by creditor pressure. However, an organised and timely AMA process may help preserve some value for owners, and at the very least should enable the best return possible for creditors of the business.

What are the key considerations for companies thinking of going through the accelerated M&A process?

Time management

The most significant difference in an AMA process (compared to an ordinary sale M&A environment) is the truncated timelines. Normally a business owner who wishes to sell may run a marketing and sale process over a number of months, in an AMA process the time from start to completion is likely to be measured in weeks or sometimes even days.

The ability to stick to a demanding timetable is a key success factor and it is essential to act quickly in order to preserve assets and customer relationships and ultimately maximise the value of the business.

Preparation 

Preparation is vital to ensure success, by seeking to avoid the delays that often lead to the failure of a transaction.

Whilst buyers are prepared for a limited due diligence process in an accelerated transaction, the financial, corporate and commercial information that is provided influences a buyer’s perception of the business and consequently its value. Having this information readily available in an virtual data room allows the buyer immediate access to the information it requires and can help maximise value.

Due diligence can pose a challenge for distressed companies who are dealing with the loss of key personnel and difficulty in accessing relevant information. Putting a plan in place early on can avoid delays and lead to a smoother process, but how much in reality you can accomplish will depend on whether it is a solvent sale or a sale through a pre-pack administration process.

From the buyer’s perspective due diligence is probably the most important aspect of the transaction. If the buyer is purchasing through an administration sale process there will be no warranties and indemnities – but this inherent risk is often factored into a lower purchase price. Conversely the seller will be expected to provide relatively usual commercial warranties and indemnities to the buyer on a solvent sale – although arguably they may in the long term be of limited value.

Advisers 

As part of its preparation, the owners of a business should seek specialist input from financial and legal advisers. These advisers should have expertise in corporate M&A and restructuring and they can initially advise on how best to structure the transaction in order to maximise returns for stakeholders.

Once the transaction structure has been decided, advisers will actively navigate the M&A process through the tight timescale, avoiding delays and enabling management to focus on operational challenges. Aware of the different interests of multiple parties, advisers can take an overarching view of the situation and communicate often difficult messages to stakeholders. They can also advise on directors’ duties in an insolvency situation and help to mitigate the risks of a later challenge by creditors. It is important for directors to take advice on their duties and to keep a careful record.

Communication 

An accelerated M&A requires communication with a greater number of parties than a normal transaction, all with differing perspectives. The support of certain stakeholders will be critical to the success of the transaction and early engagement with these parties is crucial.

Many stakeholders face making sacrifices in terms of returns on their investment and whilst the opportunity to maximise the value realised in the transaction must be made clear, this communication should be carefully managed.

Communication must also be balanced against the need to keep the deal confidential – this is particularly important in the case of employees and suppliers. Retention of key employees is essential to maintaining operations and conducting the due diligence process. Suppliers must also be carefully managed to avoid disruption of the supply chain.

Perception of the deal

Open mindedness is key to an accelerated M&A. Whilst the buyer may see a favourable acquisition opportunity, the seller is likely have a bigger job on their hands convincing stakeholders of the benefits of the sale.

Internally, the benefits should be emphasised to the different stakeholders. Investors should be reminded of the preservation of the business value and certainty of outcome offered by the transaction. For employees, focus should be on the likely retention of jobs. Externally, a well managed PR strategy should be considered in order to deal with any media attention that the transaction may gain.

It is always worth as the seller considering and anticipating what the AMA considerations will be for the buyer in a particular transaction to head off problems. For example, to understand the rationale for the buyer wanting to purchase. There will be some acquisitive buyers, who remain relatively cash-rich who see the opportunity to grow by acquiring a competitor. There will also be a different category of defensive strategic buyers, who seek to ensure continuity in their supply chain and conclude that the best way to do that is to take their suppliers in-house to protect the supply to the end customers.

An accelerated M&A transaction can therefore provide an option for a distressed company to maximise the value of the business for stakeholders and produce the greatest returns possible for the creditors – but only if both seller and buyer understand the compressed timescales, and the need to find a solution quickly to ensure a smooth transaction.

This article first appeared in CEO Today https://www.ceotodaymagazine.com/2020/05/key-considerations-and-best-practice-for-accelerated-ma/