Merger and Acquisition Process: 7 Steps for Success

Companies spend more than $3 trillion on acquisitions every year. However, Harvard Business Review reports that between 70% and 90% of the time the merger and acquisition process fails.

What do the 10-30% of businesses that succeed do differently? We will explore the answer to that in this article, including how to implement different phases of the M&A process, the importance of hiring a top M&A lawyer, and other steps to success.

Overview of the Merger and Acquisition Process

The merger and acquisition (M&A) process is a complex series of steps companies undertake to combine with or acquire another business. This process involves extensive planning, negotiation, and execution.

The following sections detail the steps involved in a successful M&A process.

Step 1: Develop a Strategy

Begin by developing a robust strategy to guide the M&A process and align stakeholders with the company’s objectives before initiating it.

Identify the motivation for the acquisition or merger (for example, expanding market share or acquiring new technology) and use this information to direct the course of the agreement.

Best Practices

Strategic Goals: Define your objectives for the merger or acquisition.
Target Company: Identify potential companies that fit your strategic objectives.
Market Research: Conduct thorough research to understand market trends impacting the acquisition.
Financial Analysis: When you have a target company in mind, do the financial due diligence to ensure it fits your strategy and wise business investment well.
Team Alignment: Get stakeholders on the same page about the strategy and objectives behind your M&A.

Learn more about due diligence while selling a company next: What You Should Expect in Due Diligence if You Sell Your Company.

Step 2: Target Screening and Identification

With the strategy in place, the next step is identifying the potential target companies. You will need to develop detailed criteria any potential takeover target would ideally meet.

Once these criteria have been established, the candidates can be ‘pre-screened’ against it.

Best Practices

Financial Health: As you research a target company, assess its financial health to pinpoint areas of strength or weakness and potential red flags.
Market Position: Evaluate the target company’s market position and competitive advantages.
Cultural Fit: How well does the target company’s culture align with your company’s values and work style?

Step 3: Due Diligence

When conducting the due diligence in an M&A process, the acquiring company meticulously analyzes the target company’s:

Business operations
Financial performance
Legal standing
Day-to-day functions

This rigorous assessment will magnify any risk, hidden liabilities, or operational challenges that could impede the completion of the acquisition contract.

Best Practices

Financial Review: Analyze financial statements, tax returns, and cash flow.
Legal Review: Investigate any ongoing or potential legal issues, including intellectual property and contracts.
Operational Review: Assess the efficiency of the target company’s operations, including supply chain, production, and management systems.
Day-to-Day Functions: What are employees’ and teams’ day-to-day tasks and responsibilities? What value do they provide to the organization?

Step 4: Valuation and Deal Structuring

The next step is valuation, which occurs after the target company is identified and its financial position, market position, and growth prospects are assessed in due diligence.

Carefully consider its assets, evaluate its liabilities, and analyze its cash flows. In short, assess its value.

Once that value is determined, the process moves on to structuring the deal itself—negotiating the acquisition price and all the transaction’s other elements.

This considers who pays for the deal, earn-outs, indemnifications, etc., – all of which go into an agreement and make it work for both sides.

Best Practices

Valuation Methods: Use multiple valuation methods to arrive at a fair price.
Payment Terms: Decide on the mode of payment—cash, stock, or a combination of both.
Deal Structure: Determine whether it will be an asset or stock purchase.

Don’t miss this article next: Acquiring and Protecting Intellectual Property Rights.

Step 5: Negotiate and Sign the Purchase Agreement

When both parties agree on the deal structure, it’s time to start negotiating the terms and conditions. This includes signing the purchase agreement, which formalizes the deal and legally binds each party to the agreed-upon terms.

Best Practices

Terms and Conditions: Clearly define the rights and obligations of both parties.
Representations and Warranties: Warranties are promises made by both parties regarding the truth of the representations provided.
Closing Conditions: Specify any conditions the parties must meet before finalizing the deal.

Step 6: Integration Planning

Effective integration is key to the success of the M&A process. In this step, both companies’ operations, cultures, and systems must seamlessly combine to realize the strategic benefits of the merger or acquisition.

Best Practices

Integration Team: Form a team to oversee the integration process.
Cultural Integration: Develop strategies to blend the cultures of both companies.
Systems Integration: Plan IT systems, processes, and infrastructure integration.

Step 7: Post-Merger Integration and Monitoring

The final stage of the M&A process involves post-merger integration, during which the combined company starts functioning as a single, integrated organization.

This does not mean the work is done, however. Ongoing post-merger efforts are required to facilitate the deal’s long-term success.

Best Practices

Performance Tracking: Monitor financial and operational performance against the planned objectives.
Issue Resolution: Address any issues or challenges that arise during integration.
Continuous Improvement: Implement continuous improvement processes to optimize the combined operations.

Speak with a Denver M&A Lawyer

The merger and acquisition process is challenging but not impossible.

Following these structured steps can increase your odds of joining the 10-30% of businesses with successful mergers.

Hiring an experienced Denver M&A lawyer can provide valuable guidance and ensure legal aspects are meticulously handled.

Contact Contiguglia Law in Denver today to speak with an experienced Denver business lawyer.

Schedule your 30-minute consultation here.

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