Ward Rentenaar
Senior Associate at Kreston Lentink Corporate Finance
Ward Rentenaar is a Senior Associate, corporate finance at Kreston Lentink, Netherlands.
Eyad Farsakh
Middle East Regional Director, Kreston Global Corporate Finance Group and Managing Partner at Kreston Awni Farsakh & Co. United Arab Emirates
Ten tips for reducing M&A risk
November 21, 2024
Mergers and acquisitions (M&A) require careful planning, including preparing a business for sale, securing financing, and realistic forecasting. Eyad Farsakh, Middle East Regional Director of Kreston Global’s Corporate Finance Group and Managing Partner at Kreston Awni Farsakh & Co, and Ward Rentenaar, Senior Associate at Kreston Lentink, share their expert insights on executing a successful M&A. Click here to read the article for Business & Accounting Daily or see a summary below.
Define the purpose
A successful deal starts with a clear understanding of its goals and stakeholder expectations. Answering questions like the rationale behind the transaction and what success looks like helps establish a solid framework.
Get the company sale-ready
In today’s volatile global landscape, preparing a business for sale is essential to reduce risks, enhance value, and streamline the M&A process. A well-prepared company has organised finances, stable working capital, legal clarity, and minimal reliance on key individuals or external parties. This preparation also helps identify and address potential risks early.
Leverage experience and expert advice
Drawing on past experiences helps refine strategies, avoid pitfalls, and improve due diligence and integration processes. With M&A being a complex and time-intensive endeavor, often taking 6–12 months, expert consultants are invaluable in guiding entrepreneurs through this emotionally charged, one-time process while they manage daily operations.
Secure early financing
Obtaining bank funding early accelerates the deal, builds trust with the seller, and prevents delays or uncertainties during closing.
Focus on details
Small but crucial tasks, like site visits and cultural evaluations, can offer insights beyond paperwork. Visiting a site before a non-binding offer (NBO) reveals operational strengths and culture, critical for aligning the target and acquirer. Poor post-acquisition integration risks losing value, so plan thoroughly to avoid it. Maintain a detailed to-do list with clear responsibilities and deadlines to ensure a smooth closing process.
Provide realistic forecasts
Overly optimistic projections can erode buyer confidence, lead to renegotiations, and jeopardize the deal if actual performance falls short.
Estimate synergies conservatively
Overestimating synergies can lead to overpaying and strain future cash flows. Conservative projections help mitigate risks and safeguard financial and reputational stability.
Perform comprehensive due diligence
Due diligence is key to uncovering hidden risks. Beyond financial and legal aspects, consider factors like IT systems and ESG practices to gain a full understanding of the target.
Carefully structure the deal
Deal structure significantly impacts tax, legal obligations, and the transfer of risks and benefits. The effective date is crucial, as it determines when ownership and liabilities shift. Options include:
- Locked box mechanism: Based on a past financial statement, offering certainty and practicality.
- Closing accounts: Reflecting the company’s actual financial position at closing but with greater complexity and uncertainty.
Balancing these factors minimizes risks for both buyer and seller.
Be clear and detailed in the LOI
The letter of intent (LOI) defines key terms, expectations, and conditions, not just the price. A thorough LOI sets a strong foundation for the deal, reduces misunderstandings, streamlines due diligence, and guides post-due diligence negotiations. It protects both parties by resolving potential ambiguities.
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