Is Your Business Mergers and Acquisitions (M&A) Ready?
Companies consolidate for various reasons and can do so in several ways, with mergers or acquisitions among the most common methods.
To understand whether your business is ready for M&A, it is first helpful to define the terms:
A Merger is when companies combine to form a new organisation.
An Acquisition is when one company purchases another company, typically resulting in the acquired company becoming a subsidiary or integrating into the acquiring company’s operations.
After steady growth and market success periods, small and medium-sized enterprises (SMEs) with solid growth potential may become attractive acquisition targets for larger organisations, or they may find lucrative opportunities when merging with another company.
With M&A activity across many sectors in Singapore returning to pre-pandemic levels, there are opportunities for businesses to strengthen strategies and supplement gaps. According to a recent article, many organisations turned to M&A post-COVID-19, as borders reopened and consolidation became a more effective means of remaining competitive. For example, Singapore Airport Terminal Services (SATS) acquired Worldwide Flight Services to meet the increasing e-commerce demands. This acquisition enabled SATS to access five major global cargo airports.
The Risks of M&A
When executed successfully, mergers and acquisitions can enhance an organisation’s growth potential and help it remain competitive in a volatile market.
However, M&A deals involve a multitude of complexities and risks resulting in a large percentage of failed transactions, so they require careful planning, due diligence, and integration efforts to ensure success.
To mitigate these risks, SME owners should prepare for thorough due diligence, and seek expert advice before entering negotiations. Although this takes time and energy, it maximises their chances of a successful M&A transaction.
Due Diligence
A typical merger or acquisition involves thorough investigation and analysis conducted by the acquiring party on the target company, also known as due diligence.
Due diligence is crucial for identifying potential risks associated with the target company that could impact the transaction's success.
So how does an SME owner know if their business will likely complete M&A due diligence successfully? Below is a checklist of areas examined in due diligence, shared by Accela Finance experts.
The acquiring company will want to see the following:
Financial stability: This includes consistent revenue growth, profitability and margins, regularised financial reporting with forecasting capability, high-quality data and good formatting, steady cash flow, and a good finance team in place. Insufficient financial information and a lack of management reporting processes are the most common due-diligence issues. Many require a re-do of the financials, which Accela Finance is set up to support.
Closely Managed Working Capital: Your business’ working capital figure will typically be deducted from the purchase price (known as the working capital peg) because it is considered essential to continue the business when it is sold on a going concern basis. This means monitoring and managing your working capital closely over a sustained period is ideal, along with keeping the average net working capital low without compromising your business’s ability to cover its monthly expenses.
Operational efficiency: This focuses on evaluating operational capabilities, technology infrastructure, vendor relationships, and the appropriateness of the workforce structure.
Operational stability: The current owner should not be relied upon for the day-to-day running of the business and should be able to walk away without needing to find a replacement, otherwise the buyers will factor a “replacement cost” into the purchase price. Ideally, a new Managing Director or CEO will be in place for 12 months before the transaction, or an internal candidate is already earmarked for succession.
Corporate governance: This involves thoroughly examining regulatory compliance and risk management, legal documentation, intellectual property rights and litigation history, which will all be checked during regulatory and legal due diligence.
Market position and growth potential: This entails analysing the market position. The target company should have a loyal and diverse customer base, strong customer relationships and excellent market growth potential.
M&A activity can be essential during periods of economic instability as businesses seek opportunities for growth and expansion. It can also be a prime time for acquisition-minded companies to look for acquisition targets at attractive prices.
It is, therefore, important for businesses considering M&A in Singapore to seek professional advice and leverage available support. Accela Finance’s services lend companies the support they need to improve their finance and accounting operations and, more specifically, to ready business owners for the M&A process .
By working closely with Accela, businesses will enhance their readiness for growth, better navigate the M&A landscape, and capitalise on opportunities to strengthen their positions in the market. If you want to know more, contact us at [email protected].