Crisis Management In M&A: Strategies For Handling Unexpected Challenges

The need for crisis management in M&A deals cannot be stressed enough. Several challenges and risks are involved in the execution of a successful merger and acquisition deal. This is why it’s always advisable to have an experienced advisor at the table who can foresee the risks.

Engaging the services of an expert helps buyers and sellers navigate critical pitfalls and arrive at a mutually beneficial culmination. The global M&A market value is facing a slide. At the time of writing this post, it was down 44% from the record high of $3.61 trillion in 2021.

The failure rate for M&A deals is a shocking 70% to 90%, and several challenges contribute to this figure. However, the future outlook for the industry is promising, with more dealmakers understanding crisis management in M&A.

Getting a handle on the possible risks and preparing to manage them is a great first step in executing deals. You’ll prepare for financial, operational, commercial, and political risks. Surprisingly enough, unexpected natural risks or “Acts of God” can also be a contributing factor.

Read ahead for the key risks that result in deals falling through and how to work around them.

Inaccurate Valuations

The most critical aspect of a successful M&A deal is valuation. Companies need to deploy effective valuation strategies based on their financials. Arriving at the right value of the company is dependent on the financial data it shares.

Sellers typically run lean setups where they economize on bookkeeping and accounting experts. Their operational processes and systems may also be informal and lack the proper documentation. This factor makes it harder for buyers to assess their value effectively.

Both buyers and sellers must work harder to arrive at a fair value that makes sense to both parties. At the same time, paying more than a fair price can potentially sabotage the buyer shareholders’ value. You should also be aware of the potential financial burden of an unfair or failed M&A deal.

A good starting point to mitigate this risk is for both buyers and sellers to be clear about their goals. They may also want to identify their expectations from the deal and explore other strategies to achieve their objectives. Experts also recommend using the appropriate price as a maximum limit as opposed to the starting point in the negotiations.

Creating a detailed financial report that includes all the relevant business information is also critical. This report must include financial data from the last three to five years, tax returns, and the number of employees.

Next, include an overview of the company’s organizational structure and any agreements entered into with shareholders. If the seller does not have in-house capabilities, hiring external expert teams to complete the task is advisable. It’s the best way to arrive at appropriate and reasonable pricing.

Poor Due Diligence

Efficient due diligence is one of the most crucial factors that can make or break M&A deals. Both buyers and sellers may want to put together a diligence team comprising key expert skills to direct the decision-making.

Think technical, operational, financial, human resources, and cybersecurity. You’ll also need advisors to assist with integration and deal execution, not to mention the legal aspect of the company sale. The right time to bring in these experts is when you’re contemplating the deal or looking for the right buyer or seller.

With their assistance, you’ll approach the deal strategically from day one and be prepared for crisis management in M&A. The value you’ll generate from their knowledge and experience will more than compensate for the costs.

You’ll know the right questions to ask and, thus, minimize the risk of unexpected surprises as the deal progresses. A great example is advice on intellectual property rights. Your legal advisor will help you arrive at the fair value of the intangible assets and factor it into the negotiations.

Inventory management is another area where small-sized sellers may fall short. Oftentimes, they are unaware of the value of the capital locked in the inventory. This value could be over or underestimated and influence the company’s valuation.

Statistics indicate that close to 45% of startups enter into an M&A to grab an opportunity too good to pass up. This is why they aren’t prepared beforehand for due diligence. It’s one of the reasons why your business plan should also integrate a strategic exit.

Founders should be ready for this step when they establish their startups and all through the growth process. Having their books and financials in place from the onset streamlines the M&A process later.

Difficulty in Integrating or Assimilating Two Distinct Companies

The integration factor is another of the key areas for efficient crisis management in M&A. Close to 44% of deals find that assimilating two distinct companies is extremely challenging. Several issues can come into play here, such as technical, commercial, operational, or workforce-related.

Buyers and sellers may enter into the deal for strategic or financial reasons, but planning integration is crucial for continued success. Managing the company’s human resources should be executed efficiently after taking into consideration the differing cultures and synergies.

The inability to address these issues can lead to the ultimate loss of value. To do that, it’s advisable to have an integration team in place that includes individuals from both companies. These people would have robust corporate backgrounds and are experts at communicating and conveying information.

To identify and eliminate duplicated and redundant tasks, you’ll need to bring in a professional who can effectively manage HR. Ensure that you maintain employee morale and productivity by being clear about the organization’s structure moving forward.

You’ll also communicate with the management personnel, who are typically only concerned with the operations aspect of the company. Keeping them in the loop is essential for effective integration.

Also, get the integration team to accurately estimate the costs related to assimilating the companies. Without careful planning, the costs can skyrocket, again taking away from the value of the deal.

Lack of Respect for the Two Company Cultures

Ultimately, successful companies are human resource-driven. Recognize that these assets ensure that startups reach their goals, innovate, and create new products. The team is also responsible for marketing, advertising, and getting products to the end users.

Yet another of the crisis management in M&A deals centers around integrating the company cultures. Owners must recognize their employees’ concerns and equip them with knowledge of their roles in the new company.

Relay information about how they are vital to the organization’s success during and after the merger or acquisition. Owners need employees to be supportive of the company’s objectives and strategies from the deal. To do that, refrain from withholding information relevant to them.

Employees leaving after a merger because they are dissatisfied with the repercussions of the deal is a common risk. The last thing you need is for the core talent to be uncertain about their positions in the new company. Nor do you need insecure, underperforming assets.

Have the integration team visit the buyer and seller’s company premises to observe how they operate. Also, conduct a detailed analysis of the management styles, workflows, culture, and overall atmosphere.

Understanding the differences will help you develop an effective strategy to bring teams from both sides together. Conducting one-on-one interviews is also a practical option to identify employees who are most likely to quit.

The key aspects to focus on are encouraging employee participation and feedback and offering info about the expected culture and workflows. Don’t expect them to follow the other company’s culture. Instead, pick a middle ground that is suitable for the teams on the seller’s and buyer’s end.

Whether fundraising or looking for an M&A deal, position your team for maximum impact in the pitch deck. Here’s a video explaining how that works.

Misunderstanding How Synergies Work

The synergies resulting from the M&A deal are the core objectives. Companies enter into deals to enhance their combined value and performance. Integrating their resources, finances, and operations should lead to higher profits, accelerated growth, and a host of other benefits.

However, that does not always happen. Experts estimate that companies tend to overestimate their combined synergies by at least 25%. The negotiation table typically sees discussions around the best practices they can integrate and the scope and scale of the businesses.

Owners also talk about sharing distribution channels, growth opportunities, intellectual property, and other intangible assets. The focus is also on a super team built by coordinating talents and skills.

Essentially, dealmakers tend to source synergies from higher revenues, targeted growth metrics, economical costs, and pooling innovation. However, they tend to ignore factors like losing customers, which can account for 2% to 5% lower sales.

Growth targets are not just reliant on the company’s performance, but also dependent on market conditions as a whole. Changes in government policies, natural disasters, and customer buying trends can influence growth–all of which cannot be predicted.

Innovation and R&D are entirely workforce-driven, and dealmakers may underestimate operational and cultural issues, resulting in employees leaving. Not being able to access new ground-breaking ideas and technologies or arrive at ideal product-market fits can also be a downside.

Cost savings might not materialize as planned. Planners may overlook one-time expenses or fail to analyze foundational costs.

Your Solutions

Work around these possible issues by doing whatever it takes to retain key personnel. Also, conduct detailed analyses on market conditions and customers against reliable benchmarks for accurate estimates.

Most importantly, prepare to infuse agility in the workflows and organizational practices. Be flexible and open to pivots if necessary to keep the company on its growth trajectory.

Agility and flexibility can also come in handy when you’re executing a fundraising initiative. Prepare to make changes in your strategy if the initial approach isn’t working.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Other Commonly Overlooked Pitfalls that Need Efficient Crisis Management in M&A

Efficient communication and complete transparency are ultimately keys to a successful M&A deal. You’ll maintain open lines of communication at the negotiation table. Reveal all the essential data by sharing information through virtual data rooms to maintain security.

Be aware of and prepare for cybersecurity threats and hacking incidents. You’ll protect data with robust encryption techniques, digital watermarks, multi-factor authentication, and passwords.

Underestimating the Costs Associated with the M&A Deal

Executing M&A deals typically incurs costs for both sides. Anticipating and planning for these costs is essential for a streamlined process. You’ll also work on approaches that can help you cut down and minimize expenses.

Multiple types of fees are involved in finalizing the deal, and when added up, they can take away from the positive value of the transaction. Factor in investment banking, accountant, and advisor fees. Also, account for the legal charges, real estate appraisal, environment testing, and database analysis.

Manage due diligence expenses by opting for a flat rate model instead of a per-page model. This approach will help you lower the expense without risking the data and information you share. Also, leverage technology, such as utilizing project management platforms to eliminate repetitive and redundant tasks.

Don’t overlook integration costs like rebranding the new company, training employees, and hiring new talent as needed. You may also have to rework the compensation structure for the core talent you want to retain in the new organization.

Make sure your M&A deal complies with all the relevant regulations and requirements. Missing out on compliance could result in unexpected legal costs, which you’ll want to avoid. Proactive planning can get you there.

As for the charges payable to the M&A advisor, expect to pay a fee of 1% to 3% of the total transaction amount.

Before We Sign Out!!

Company owners coming to the negotiation table typically lack experience in how M&A deals happen and the possible pitfalls. This is why they need the advice and direction of an expert M&A advisor. You can rely on this professional to help you with crisis management in M&A.

Without this assistance, most owners face unexpected challenges that can take away from getting the best out of the deal. They also risk hurdles during the deal execution and the integration after the merger.

Most importantly, you risk the long-term success of the merged companies.

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