Buyer Perspective - 8 Key Considerations for Accelerated M&A

Accelerated M&A can be an attractive method of acquiring a business that is in challenging financial circumstances. Despite a business struggling, you may have identified significant underlying value in the company or a particularly attractive asset within the business. By acting fast, accepting a different risk profile and taking a highly focused approach, accelerated M&A can deliver that value at a fair price.

Two types of buyer typically adopt the accelerated M&A route:

1. opportunistic buyers which are cash-rich and seeking to increase their capacity and market share; and
2. defensive buyers which are seeking in-house suppliers to ensure business continuity after identifying liquidity and solvency issues in their supply chains.

Whatever your motives, drawing from our experience advising on hundreds of M&A transactions and distressed sale processes, we have set out below our key considerations for buyers that are looking to make an acquisition using the accelerated M&A route.

1. Identify value

Leveraging your detailed understanding of the market and your contacts in the sector is invaluable to identifying businesses which offer attractive value propositions but which may be looking to make an accelerated sale in light of challenging financial circumstances.

Appointing experienced corporate finance advisers who understand your commercial needs and who have a wide network of contacts is also invaluable in identifying opportunities to acquire businesses through an accelerated process. Your advisers should be able to manage expectations on price so that all parties are aligned from the outset and the deal can proceed with speed while also making sure your offer is as attractive as possible among competing bids.

2. Targeted due diligence

Effective due diligence is essential to identify any material issues relating to the target’s business and assets. It is unlikely that a comprehensive due diligence process will be possible in the time available. Therefore, it is important to target the areas that really go to value. For example, these would include the target’s level of indebtedness or it might be the target’s intellectual property, commercial contracts or a particular regulatory permission.

Title to the assets should always be established (whether on a share or asset sale). On a share sale, a thorough review of the target’s statutory books should be undertaken as soon as possible. Any irregularities (e.g. failed share buybacks) would need to be dealt with prior to sale and are likely to take a significant amount of time to rectify; this could be a deal-breaker if the parties must adhere to an accelerated timetable.

Equally, if it transpires there is a very large shareholder base and/or option holders, considerable time may be needed to engage with these parties and ensure they sign up to the transaction in time. If minority shareholders are not cooperative, commercial incentives (e.g transaction bonuses) or legal mechanisms (e.g. drag rights) can be used to unlock the deal. Again, these issues must be identified early in order to align with the accelerated M&A timetable.

Similar considerations will need to be given to any conditions required to acquire the target. For example, if FCA change of control or competition clearance is required ahead of completion, then it is unlikely that an accelerated timeline will be possible.

3. Contractual protection

In an accelerated process, particularly where the purchase price is significantly discounted, there is likely to be much more limited warranty and indemnity cover. For these reasons, the few warranties that are accepted should be focused on key areas such as ownership, indebtedness and the specific value identified in the business (e.g its intellectual property or key contracts).

The risk in accepting limited warranties can be offset by targeted due diligence. However, extracting accurate due diligence responses from the sellers and/or management may be challenging given the limited time and the many distractions facing the sellers and their senior management if the business is in financial crisis.

Various contractual tools can be used to incentivise the provision of accurate and informative responses from the sellers. These methods can include provisions that set off the amount of any claim (or potential claim) from an amount which is otherwise due to the sellers and/or senior managers. There may even be shares being issued in the buyer’s group which can be withheld if there is a breach (or potential breach) of warranty.

These methods help draw out issues pre-sale so that appropriate action can be taken in advance. Such actions could include a reduction in price, a retention amount or even restructuring the deal as an asset sale.

The increasingly sophisticated W&I insurance market may also be an option where the sellers cannot provide sufficient warranty protection.

4. Communication

To help avoid the erosion of value and goodwill among key stakeholders, ensure that the target’s communications to staff, suppliers and customers are consistent, clear and coordinated and confidentially address the particular concerns of each group at the appropriate time.

5. Third party dependencies

The need to obtain consents from third parties could have a devastating impact on the deal timetable if not prioritised. In certain circumstances, it will be important to ensure that the sellers open communications with customers and suppliers where their prior consent is required to the transaction (such as where their consent is required to a novation of a key contract or because of a change of control clause in a key contract). This dialogue should be initiated early as it is more difficult to control the timeliness of third parties, a particular risk when the deal has to be completed within weeks or even days.

6. Time management

Time is of the essence in an accelerated M&A transaction and so requires the resources to move swiftly. Ensure that all relevant officers and advisers are available to adhere to a tight timetable, as delays could adversely impact negotiations and the transaction.

Be prepared to understand the many commitments on management’s time particularly given the typically serious financial issues impacting the business. You should seek to ensure that management are not overly distracted from operating the business during the sale process.

Setting key dates and times during which prolonged management input is required, as well as timetabling regular update calls, will aid this process.

7. Flexibility

The outcome of the accelerated M&A process may not be certain until the later stages of the deal, so keep an open mind where possible and be prepared to accept a higher risk profile in return for a more attractive purchase price.

It is also key to remember that, despite the target being in challenging circumstances, you should not assume the buyer holds all of the bargaining strength. It is therefore important to still be willing to compromise. The sellers will know that the target represents real value to your business and the decision to withdraw from the deal and switch to an insolvency route can be taken by the sellers at any point if this appears more attractive.

8. Insolvency considerations

Appointing corporate finance advisers and lawyers with a strong track record of advising on accelerated M&A deals is essential. Crucially, we recommend using firms that also offer restructuring experience in order to avoid switching advisers part way through the process. At Freeths, we frequently integrate the expertise of our corporate lawyers and insolvency specialists from the outset of the accelerated M&A process to provide you with the most comprehensive advice whenever you need it.