Now is a good time to prepare for M&A

Merger and acquisition remains a viable exit strategy for many companies and while the perception is that valuations may be down in 2009, there are still some great deals to be made. If you are looking to merge or be acquired over the next 12 to 24 months, it’s important to be ready.

There are several immediate steps companies can take now. Consider the following.

Write up a management discussion and analysis (MD&A) statement of your company. Explain your business cycle, key initiatives, and whatever makes your company special. If you haven’t done this before, use as a guide what companies in your industry have written in their SEC filings. Learning what questions the SEC had on its initial S-1 will also be helpful. Then, periodically update your MD&A. This is also a great way to make sure you understand what your core business value is – the MD&A write-up is not a de minimus exercise and has caused may an executive to rethink what their core business value really is.

Have good, clean quarterly cut-offs. Even if your potential acquirer is not a publicly traded company, having three years of good quarterly information provides a solid foundation for analysis. To have yourself disciplined to generating clean quarterly financial information will also mean you have more accurate picture (versus gut) of your companies situation and if a publically traded company does show interest – you are ready.

Clean up your accounts. Review the obvious and write off old receivables and write down old assets. At the least, know what they are and understand that these probably will not transfer to the acquirer at face value. Know where you have problems – if you are a manufacturer – how realistic is your cost to manufacture your product? Any potential acquirer knows where to look for fluff – know where all your fluff is and be prepared to cut it.

Segregate “plain vanilla” transactions from complex transactions. Maintain proof or other documentation on why your complex transactions, e.g., software revenue recognition, are worth what you say they are. Keep in mind that what you may consider simple could be interpreted as complex by a potential acquirer. The more you can classify transactions into distinct groups, the better you’ll be able to make the case that your company is worth what you are asking.

Disclose and fully document technical accounting transactions. Then be sure to maintain that level of documentation for existing and new transactions.

Review employment contracts. These include stock options and other equity agreements, parachutes, non-competes, and other severance agreements. The key word is “review.” Don’t rely on what you think you know. Review all agreements in detail to understand all the fine print. Get your legal advisor involved where appropriate. If something could cause a potential M&A deal to stumble, now’s the time to re-negotiate or clean up contracts.

Reassess your customers or client base. Make it your business to know the financial health of your key clients. Assess whether they will continue to do business with you after the merger or acquisition.

Evaluate your infrastructure. Make sure your accounting system is robust enough to handle your current and expected new capacity. This will enable you to determine what investments you may need to make in systems, people, and processes. It will also help you establish what you’ll need to stay on track – whether or not a merger or acquisition occurs.

Consider the implications of SOX compliance issues. If you were to be acquired by a public company and became a significant component of the new entity, the best way to enhance your value is to be SOX ready, which includes having robust internal controls in place. If you won’t be a major component of the new company, good internal controls will help alleviate potential concerns the acquirer may have about value and integration issues.

While private companies won’t require you to be SOX complaint, they understand “significant deficiencies and material weaknesses” and may interpret such statements on your part as warning signs that what they see may not be what they get. Again, robust internal controls will help you make your case.

For more, email Connie Wright, AMS Managing Director, Client Services, or call her at 781-419-9240.

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