An M&A transaction does not begin when the term sheet is signed. Its foundations are laid much earlier – at the point where the owner starts to consider a sale, bringing in a strategic partner, or a deep reorganisation of the structure ahead of the next phase of market expansion.
The level of substantive and organisational preparation of a business has a direct impact on the dynamics and the ultimate shape of the entire transaction process. A company characterised by an orderly internal structure builds strong credibility in the eyes of potential investors, which allows for smoother negotiations and minimises the risk of failing to reach agreement on valuation. Actions taken at the pre-transaction stage are of key importance, with particular emphasis on Vendor Due Diligence (VDD), the reliable identification of structural constraints, and restructuring measures, which not infrequently determine the ultimate success of the transaction.
Vendor Due Diligence – viewing the company through the eyes of an investor
Vendor Due Diligence (VDD) is a multi-faceted examination of a company’s condition, carried out at the request of the seller itself, before the formal commencement of the transaction process with potential investors. Unlike a classic due diligence exercise initiated by the buyer, this examination allows the existing owners to objectively assess their own organisation from the perspective of an external, potential investor and to appropriately address any risks identified.
The benefits arising from implementing this procedure are as follows:
- Increased transparency of the process: the seller identifies key risks and potential operational and legal weaknesses before they are disclosed and used as a negotiating argument by the other party to the transaction.
- Optimisation of the timetable: a significant proportion of the questions and doubts that would normally only arise at the stage of the buyer’s due diligence are addressed and clarified at an early stage.
- Reduction of transaction risk: eliminating the unwanted element of surprise at an advanced stage of negotiations drastically reduces the likelihood of the talks collapsing.
A Vendor Due Diligence examination may cover legal, financial, regulatory, tax, operational, technical or environmental areas, aiming for a comprehensive and objective assessment of the company’s condition. In particular, verification covers key contractual relationships, corporate governance, and legal title to the shares and the company’s main assets. In addition, the examination covers historical and projected financial results, the level of regulatory compliance, business and capital relationships with the founders, and the operational effectiveness of key processes. It is precisely at this stage that irregularities capable of derailing the transaction effort are most often identified.
Carrying out an effective VDD examination requires cooperation between external transaction advisers and the company’s internal team. An indispensable element here is the involvement of the legal department, whose ongoing support enables a swift response to any problems identified.
External and internal constraints
Designing a transaction strategy requires a meticulous analysis of the conditions determining the parties’ freedom of action. These factors are divided into constraints of an external and an internal nature.
Key external constraints include regulatory barriers (including antitrust procedures before the competent competition authorities), macroeconomic changes in the economic environment, and competitive dynamics in the market. These elements may extend the transaction’s time horizon or limit the pool of potentially interested investors.
Internal constraints, in turn, are embedded directly in the organisational, financial and personnel structure of the company under examination. A multi-tiered, non-transparent ownership structure, tensions in the area of financial liquidity, capital shortages, or disorganised corporate relationships translate directly into the valuation of the business. They also constitute a significant factor delaying the negotiation phase.
Reorganisation of the structure prior to the transaction
In many cases, carrying out a transaction on optimal economic terms requires prior restructuring of the legal form or business architecture of the company.
The most commonly used reorganisation instruments include: carving out an organised part of the enterprise or a specific business line into a dedicated special purpose vehicle, converting a sole proprietorship or a partnership into a limited liability company, and making use of the family foundation in order to safeguard succession and transaction processes.
Reorganisation processes extend far beyond the purely formal-legal sphere. They require close cooperation between the management board, the legal department, external advisers and the owners themselves. It is not uncommon, at this stage, for conceptual differences to emerge regarding the direction and pace of the changes being implemented. A necessary condition for success becomes transparent and effective internal communication among all stakeholders.
Transaction strategies and alignment with the investor
In market practice, there is no single, universal model for selling a business. The choice of the optimal strategy depends directly on the profile of the potential investor. A merger process with a strategic industry investor calls for different negotiating structures and argumentation than cooperation with a private equity fund, and yet different again is the process of securing a financial investor interested, for example, solely in a minority stake.
An effective transaction strategy must be based on an objective and realistic assessment of market realities and precisely defined long-term goals of the existing owners. The highest transaction success rate is recorded by those entities that put their legal and financial affairs in order sufficiently early, while remaining ready to adapt the terms of the transaction to the specific requirements of the market and the expectations of investors.
Summary
The process of preparing for an M&A transaction should be initiated long before the first contact is made with potential investors. Vendor Due Diligence carried out by external advisers enables the early identification and neutralisation of risks. A thorough analysis of constraints allows for realistic planning of the action timetable, while a well-planned reorganisation of the structure often becomes a condition for the successful completion of the transaction.