A business merger requires months of preparation and negotiation. Typically, the current leaders working at both organizations need to review the proposed transaction carefully to ensure that it is beneficial and that the resulting organization can compete on the open market.
In addition to negotiating specific terms for a merger, the parties involved in preparing for the transaction typically also need to perform due diligence. They need to look into the other company and prepare for the practical challenges associated with combining the two organizations. There are certain issues that could come to light during the due diligence stage that could serve as an indication that the transaction might not actually be beneficial for the companies.
What factors require careful attention to better ensure that a proposed merger is viable and beneficial?
Financial records
Those proposing major business transactions may highlight positive features about a company while glossing over potentially concerning elements. For example, leadership at one company may report the value of equipment and machinery without accounting for depreciation. They might use outdated market research to predict future sales and therefore company profitability. Both organizations likely need to review the financial disclosures of the other very thoroughly to ensure that the information presented is accurate and reliable.
Brand reputation
Market share and sales aren’t the only things that matter when preparing for a business transaction. How consumers perceive the company can also be important. Not every prior or current customer is likely to continue patronizing the business. Factors ranging from bad press because of a substandard production batch to concerns within the local community about the company’s practices could mean that the company could lose the goodwill of consumers. Such situations may culminate in a reduction in profits or overall market share.
Crucial contracts
Contracts ranging from commercial leases to employment agreements can have major implications for a company’s future. A merger might occur right before several key professionals become eligible for their golden parachutes. The company might not be able to downsize facilities for years if there is a long-term commercial lease involved. Contracts can have a major impact on the future.
Performing an in-depth review is part of the due diligence process can help ensure that a merger is likely to succeed. Executives, investors and owners may need to secure outside assistance during due diligence and contract negotiation processes to take some of the risk out of a pending merger, and that’s okay.