Mergers and acquisitions (M&A) in the construction industry are complicated and this complexity is now compounded by restrictions implemented during the COVID-19 pandemic. In addition, there are overlaps between business and legal but having the right team to help you navigate both sides of mergers and acquisitions is the key to success.
Part 1: The Business End
Knowing how to navigate mergers and acquisitions is extremely important. While your lawyer is handling the legal end for you, any potential acquisition focuses on the financials and the record-keeping that supports the corporate structure.
For starters, you, as the seller, absolutely must know how to value your business before putting it on the market.
Buyers will look for:
- The proprietary technology and licenses your company possess
- Your company's financial performance
- Your company's projected growth
- Prices employees recently paid for shares
- Whether your company is a good IPO candidate
- Whether you have multiple bidders or a single potential buyer
Having this information ready will move the sale process along more smoothly.
From a buyer's perspective, acquiring a construction business can help grow a company's revenue. For example, with an acquisition, you can:
- Add new specialties
- Acquire an experienced labor force for new markets
- Broaden your footprint in the market you already serve
Whether buyer or seller, it is best to keep merger and acquisition plans quiet. Beyond employees, this kind of news can cause unease among suppliers, bonding companies, lenders, and customers. Silence can, indeed, be golden in these instances.
There is more to mergers and acquisitions than agreeing on a purchase price and signing the paperwork. A mergers and acquisitions advisor can help you navigate the M&A process and employ the latest "best practices," whether buying or selling. As a seller, do not be afraid to negotiate to get to the price you want. Buyers rarely give their best offer first. Make a counteroffer. A reasonable counteroffer is not likely to be poorly received.
Buyers should consult a team of legal, accounting and tax experts when they first begin shopping. This team helps to avoid mistakes. Acquisitions typically open doors to new revenue streams, thereby improving a company's market position or broadening its footprint across a region. In addition, size can be advantageous since it gives firms access to more significant projects, leading to faster growth.
Acquisitions offer companies a way to acquire that scale to establish a market presence that can lead to profitability and financial resilience. It can also lead to previously unattainable access to a labor force with new specialties or new entry to funding and bonding.
Sealing the Deal
As a deal begins to solidify, but the seller and the potential buyer cannot reach an agreed-upon acquisition price, consider an "earnout." An earnout is a contractual provision in the agreement allowing the seller to receive additional funds if the sold business achieves specific financial metrics, including gross revenue or EBITDA milestones. That is "earnings before interest, taxes, depreciation, and amortization."
An earnout can be risky but allows the sellers and their stockholders to receive the return they seek, in time, based on the business's continuing performance following the closing.
Most mergers and acquisitions take a while to complete. A four- to six-month period is not uncommon. It depends on how quickly the buyer performs due diligence and completes the transaction and whether the seller runs a competitive selling process. An investment banker or financial advisor can run an auction sale process, which forces all parties to make decisions more quickly.
Have a draft disclosure schedule ready early. Allow the CEO to discuss a value-add that the seller can provide the buyer. The company CFO will answer financial questions to defend financial projections. Both sides should hire experienced M&E negotiators to lead the process and make quick decisions on their company's behalf.
Be Prepared for the Buyer's Due Diligence
Intelligent buyers will conduct substantial due diligence before signing any papers to ensure they are fully aware of what they are buying and what obligations they will assume. They will also learn the nature and extent of its problematic contracts, litigation risk, contingent liabilities, and more.
Set Up Your Online Data Center
As the seller, prepare for due diligence with an online data room an electronic warehouse for all key company documents. Populate it with your company's most important documents, including contracts, employee information, corporate records, and contracts. In addition, include financial statements and a capitalization table.
This data room allows you to control how this information is viewed and helps preserve confidentiality. The data room can also expedite the M&A process by eliminating physical storage space. You can access all documents, or a subset of records only pre-approved individuals can view. Set up the data room so you can see who has been in it on what dates and for how long. This helps inform you of the buyers' level of interest and which areas each bidder values most.
Get the Best Deal with Multiple Bidders
Multiple potential bidders typically mean the seller will get the best price. You can leverage the competitive situation, obtaining a higher price with better terms. Negotiating with just one potential buyer puts the seller at a real disadvantage. It can be advantageous to set up an auction sale to draw more bidders that you can play off of one another for a more favorable deal.
Allow lead negotiators from both sides to communicate, limiting any antagonism. Always professionally conduct negotiations.
Flex with the Reality of COVID-19
These past two years have been a challenge, with so many impacts on mergers and acquisitions. Business uncertainty has contributed to numerous buyers postponing acquisition plans or dumping them altogether. Due diligence and how it is conducted have changed, deal terms have changed. Availability, pricing and other terms of financing have also been impacted. With many people working remotely, there is no more getting everyone in one room. Get creative with technologies and techniques, which are now more critical as buyers and sellers, and finance providers adjust to the changing environment.
Deal timelines in 2021 will be significantly extended. As a result, each stage of the transaction will take longer, including preliminary discussions between the parties, negotiation of an acquisition agreement, negotiation of a letter of intent, and the pre-closing period.
Expect delays in obtaining regulatory and antitrust approvals. The Department of Justice recommends adding 30 days to mergers and acquisitions. Internal justifications for deal-making will need to be more coercive because buyers and their boards of directors will be much more cautious. Buyers will want to shift more closing risk and indemnity risk to sellers.
Financing will take longer, and lenders may seek stricter closing conditions, increasing buyers' and sellers' risk. Remember, though, many buyers remain "cash-rich" and can afford to take more time to find the right targets, even at a time when they face their own business challenges. Sellers need to take care not to breach an acquisition agreement with steps to respond to the pandemic. And the buyer may try to argue it should not be required to acquire a business whose value has deteriorated due to COVID-19 issues. Have the buyer pre-approve your contingency plans to avoid any disagreements.
The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.