It's no secret that small and medium-sized enterprises (SMEs) are the engine of Spain's business landscape. What may be news, however, is SMEs deciding to seize the opportunities offered by mergers and acquisitions (M&A) processes, just as large corporations do.
For many entrepreneurs and owners of midsize businesses, M&A processes — mergers and acquisitions — can seem as complex as preparing for a moon landing. Even more so in today's climate of global economic uncertainty.
Even so, more and more SMEs are discovering in these moves an opportunity to build alliances, connect with investors, and improve their financial position.
That said, if we want to succeed with an M&A deal, before getting started it's essential to know the seven most common mistakes small and medium-sized enterprises make with these kinds of moves.
Mistake #1: Lack of clear objectives
The first step before starting the process of selling or buying a business is to be clear about why we're doing it and the outcome we want when the deal closes.
Having this information will help us analyze and find potential buyers or sellers, and identify potential competitors, suppliers, or customers.
At the same time, being clear about the objective of our sale, future merger, or acquisition will allow us to uncover and analyze the different alternatives available – such as competitive processes with more than one investor, to give just one example – that can help us gain visibility and reach our goal.
Although it may seem obvious, defining the outcome we want from our M&A process is vitally important, so it should become our top priority.
Mistake #2: Insufficient involvement in the M&A process
Successfully completing a merger or acquisition requires a great deal of commitment, both in time and resources. And managing investors' expectations, keeping an open line of communication with them, and building trust and rapport is essential.
However, SMEs are sometimes so caught up in day-to-day operations that they neglect this aspect, which leads to delays, friction in the analysis, and, as a result, a lack of trust between the parties.
That's why it's key for companies to have a third party help them manage the entire process, allowing them to focus on running the business and only deal with the key issues of the transaction.
Mistake #3: Ignoring the macroeconomic environment and its impact on the sale
SMEs are not isolated entities that exist apart from the national, regional, or international socioeconomic context. Quite the opposite: they are often heavily influenced and affected by what happens beyond their borders and their own income statements.
Failing to take the macroeconomic environment into account, along with the impact it can have on a potential merger or acquisition (in terms of timelines, valuation, investors, documentation, etc.), can become a major obstacle on the road to a successful deal.
Mistake #4: Not having an M&A plan
Many SMEs embark on an M&A process without a clear strategy. In other words, they know what they want, but not the steps they need to take to achieve their goal.
To avoid this mistake, it's essential to have a thorough strategic plan that gives us a roadmap and lets us assess the risks at each stage.
Mistake #5: Not conducting financial due diligence or using incomplete or outdated information
One of the fundamental parts of an M&A plan is carrying out a valuation that identifies and quantifies the real value, both current and potential, of the company involved in the deal. It's also about knowing whether the partner or company chosen for the process meets what we want for the business over the coming years.
Ultimately, the success of any M&A deal lies in having all the key information ready in advance and being clearly willing, after receiving the non-binding offer, to share additional information so that the investor can complete their preliminary analysis and make a binding offer.
One of the best ways to ensure the process succeeds, and to avoid unpleasant surprises down the road, is to conduct thorough “due diligence”, which requires the knowledge and experience of an independent expert.
Mistake #6: Not having a complete data room from the start
Put simply, data rooms are secure online environments that allow the parties involved in an M&A process to share and exchange the confidential documents needed to carry out proper due diligence.
Not having one from the start delays the timeline, since documents have to be sent again every time there's interest, instead of being centralized for all parties from the outset.
Mistake #7: Poor management of the negotiation
Every M&A process is different and, as such, has its own particularities and specific needs.
Many SMEs make the mistake of jumping into a process without first establishing a course of action for negotiating aspects such as the payment structure (one-off, upfront payment followed by an earn-out…) or the non-negotiable elements that must therefore be accepted as sine qua non conditions of the agreement.
For these reasons, before starting a merger or acquisition, we need to be aware of how important it is to understand the ins and outs of an M&A process in depth, and to have the expertise needed to manage the negotiations well.
Are you an SME that needs help with an M&A deal? Do you have questions and don't know how to find investors for your company? At Deale, we have a team of experts specializing in mergers and acquisitions who will help you find the best investors so you can strengthen and accelerate your company's growth.
