October 10, 2022
Maurits Hesseling, Board Member of Translink International and Managing Partner of Translink Benelux, discusses four important considerations that companies need to prioritise in this current M&A environment.
From an M&A perspective, companies need to be more cognisant than ever when it comes to mitigating their risks amid the current turmoil being experienced globally. Geopolitical uncertainty, falling equity valuations, rising inflation, surging interest rates and the effect of the pandemic are all factors influencing the tough economic headwinds being experienced across the board.
Maurits Hesseling, Board Member of Translink International and Managing Partner of Translink Benelux, says that there are four very important considerations that companies need to prioritise in this current M&A environment.
The first is the importance of expanding your due diligence. Traditionally, a comprehensive appraisal would investigate the standard areas of finance, legal and human resources. Given the current climate, Hesseling says that due diligence needs to go even deeper when verifying and assessing a potential purchase, to enhance the type and quality of the information and to enable the buyer to make the most informed of decisions.
Projections and Forecasts
In a more stable economy, a buyer would look at projections and analyse how a company was expected to grow. What is currently happening is that a significant part of a company’s growth can be attributed to inflation, which also affects turnover.
“What we would like to emphasise is to be more critical on projections and focus more on the worst-case and stress scenarios, instead of the best-case scenarios, which might have been the case in the past,” Hesseling says. The key here is to be much more critical when analysing potential risk.
From the seller’s perspective, Hesseling reiterates the importance of making sure that your company projections are realistic, based on the situation the company is in currently, and including details of any challenges and headwinds the company may be facing.
Similarly, banks involved in financing these deals are even more cautious today and need reassurance that their investment is in a company that shows resilience despite current challenges.
The strength and capabilities of the workforce are also an important M&A consideration.
“The number one risk right now is the workforce. What companies should do is to clarify how strong the workforce is, what the competence of the workforce is and what might be lacking,” Hesseling says. Buying a company only for the key people to leave, based on the acquisition, is a very real risk that needs to be assessed.
Tools to Reduce M&A Risk
Given the financial and commodity volatility experienced today in the M&A sector, M&A insurance is becoming an increasingly important tool to reduce any risk for both the buyer and the seller.
The Material Adverse Change (MAC)-clause is being used more often and is playing an increasingly significant role in M&A, especially since the COVID-19 pandemic, says Hesseling.
This clause comes into effect after signing a sale and purchase agreement (SPA) but before the deal is completed, a period of time that can exceed a year.
The (MAC)-clause provides the buyer with the option to abandon the acquisition before it closes, should the situation change to such an extent that it is no longer suitable or advantageous to proceed with the transaction.
“While most strategic buyers are well prepared and know what they are looking for, they cannot take anything for granted during this new and challenging business climate,” says Hesseling.
“A significant part of the valuation of a company is based on projections, but projections are not as straightforward as they used to be, which is why we urge companies to expand their due diligence and go beyond the traditional assessment areas to find out more about the company,” he says.
Despite a volatile operating environment, valuable opportunities still exist globally within the M&A space. While the depth and complexity of due diligence might seem daunting, having a trusted, corporate finance partner can help guide and ease the process.
Translink Corporate Finance, a world leader in specialised mid-market corporate advisory services, has deep local market expertise in more than 35 countries around the world, with in-depth industry expertise and transactions concluded across numerous sectors.
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