m&a community logo
M&A process: A comprehensive guide
Back to Insights

M&A process: A comprehensive guide

na M&A
m&a process
m&a process

Mergers and acquisitions are a widely adopted strategy for companies looking to increase value, achieve growth, or expand market share. According to Bain & Company, the value of global M&A deals reached $3.8 trillion in 2022.

However, executing an M&A process is no small feat and demands significant effort from both the sell- and buy-side. It requires a well-thought-out plan that considers several factors.

The guide below comprises all the fundamentals about establishing a well-planned M&A process for the acquirer and the target. Read on to learn more about:

  • The process of mergers and acquisitions explained
  • How much time does the M&A process take?
  • Sides and participants of the M&A process
  • M&A process steps from the buy- and sell-side’s perspective
  • Possible challenges of M&A processes

The process of mergers and acquisitions explained

Mergers and acquisitions are complex yet one of the most powerful tools an organization can adopt to achieve growth and enhance their competitive position. 

What are mergers and acquisitions? The term refers to a financial transaction during which one company acquires another company in assets or stock, or when two companies consolidate into one united company.

The mergers and acquisitions process involves multiple parties and stages that slightly differ for the sell- and buy-side. Nonetheless, the mergers and acquisitions process flow usually includes planning, research, valuation, due diligence, deal closing, and post-merger activities for both sides.  

The guide below discloses the details of each stage for both sides.  

How much time does the M&A process take?

The M&A process timeline can vary greatly and is dependent on several factors, such as the size of the companies involved, the complexity of the deal, and the regulatory approvals required. On average, the process can take anywhere from a few months to a few years. 

To effectively manage the timeline, it’s essential to establish a desired closing date and create a detailed timeline for each step of the process. However, it’s also essential to prepare for unexpected delays or complications that may arise, such as regulatory hurdles or unexpected legal issues.

Having a contingency plan in place can help mitigate delays and ensure a smoother M&A process. It’s also important to communicate effectively with all parties involved in the deal and maintain open lines of communication throughout the entire process.

Sides and participants of the M&A process

The deal team that maintains the acquisition process usually consists of many people. The most common roles and responsibilities are described below:

  • Buyer. A buyer looks for potential target companies to acquire. There are two types of buyers: strategic and financial. Strategic buyers aim to achieve synergies that will enhance their competitive position. They typically operate in the same or an adjacent industry and acquire companies for operational reasons. Financial buyers are typically institutional buyers such as private equity firms or hedge funds, who acquire companies primarily to generate a return on investment.
  • Seller. Simply put, this is the target company a buyer aims to acquire and all the entities that are involved in the process of sale. The sell-side of the acquisition deal also has its primary reason for the transaction, which is either strategic or financial. Similarly, strategic sellers seek to achieve synergies that will improve their competitive position, while financial sellers aim to generate a return on investment.
  • Investment banks. During mergers and acquisitions, investment bankers act as financial advisors and can represent either the sell- or buy-side. Investment banking specialists help the side they represent to get the most out of the deal.
  • Law firms. Both sides of the deal require legal assistance to ensure that the deal is conducted in accordance with the law and that all legal requirements are considered. The latter include antitrust laws, tax implications, and government regulations.
  • External consultancy firms. Sometimes companies hire external advisors to assist with unbiased evaluation. Third-party consultants are also helpful when conducting cross-border deals since they can provide valuable expertise in regional laws and regulations.

M&A process steps from the buy- and sell-side’s perspective

Merger and acquisition steps and planning are an important part of corporate development strategy. It’s fair to say that the M&A process stages might differ depending on the deal—some adopt a 7-step acquisition process, while others apply a few extra steps to finish the transaction. 

We offer a 10-step process of mergers and acquisitions, both for the sell- and buy-side. Let’s review what each of the 10 stages implies. 

10 buy-side stages of mergers and acquisitions

The M&A process steps for the buy-side can be divided into 3 phases that look as follows: 

Preparation and planning:

  • Development of the acquisition strategy
  • Development of the search criteria
  • Creating a list of potential target companies
  • Starting acquisition planning

Evaluation and negotiation:

  • Conducting evaluation
  • Negotiating
  • Initiating the due diligence process

Deal closure and integration:

  • Creating a purchase and sale agreement
  • Creating the final financing strategy
  • Deal closure and integration

Let’s now review what happens at each stage.

1. Development of the acquisition strategy

Before an acquisition takes place, managers of acquiring companies must understand the reasons behind the acquisition. This may include gaining access to new markets, increasing development opportunities, or diversifying their product line.

The executive team and outside consultants collaborate to develop a comprehensive mergers and acquisitions strategy. This involves establishing objectives for the prospective deal and identifying potential target companies that can help achieve those objectives.

It is critical at this stage to consider the current financial position of the acquiring company, market conditions, and future projections. These factors will impact the viability of the acquisition and the potential benefits that can be realized from it.

2. Development of the search criteria

At this step, a buyer defines the set of M&A search criteria to rely on when identifying potential targets. The list of criteria usually includes:

  • Industry

This implies finding out whether the potential target operates in the same or adjacent industry and identifying the crossover between the target’s and buyer’s industries. (A buyer from the biotech industry will more likely be interested in mergers and acquisitions in the healthcare industry, for instance.)

  • Geography

It presupposes investigating whether a potential acquisition can help access new geography or give more market share in the existing one.

  • Revenue

This involves identifying the potential size of the united company in financial terms.

  • Market

It’s important to analyze the market the target company operates in and whether it can help the acquirer to grow or expand its operations.

  • Intellectual property

It implies identifying whether the target company owns any tangible assets the buyer can own after the acquisition.

3. Creating a list of potential target companies

Based on the results from the previous steps, the acquirer can search for ideal targets and form a list of potential candidates. At this stage, the brief evaluation based on the search criteria and the acquirer’s mergers and acquisitions strategies is enough, as a thorough evaluation process will follow.

This preliminary evaluation should include an analysis of the target’s financial position, industry position, and potential for synergies with the acquiring company.

4. Starting acquisition planning

This is when an acquirer starts contacting target companies, usually one or two, that seem the best fit for the potential deal. 

Typically, the buy-side sends a letter of intent (LOI) to the potential target company, expressing their interest in a merger or acquisition and providing a summary of the proposed deal.

The key purpose of this step is to inform the potential target about M&A interest, find out whether they’re interested in the deal, and ask for additional information that will be used during the valuation process if the deal proceeds.

5. Conducting evaluation 

After getting confirmation from the seller about interest in the deal, the representatives of the buy-side perform a valuation analysis of the potential target.

The acquirer evaluates a target’s financials to define its true value as a standalone company and its potential as a merger or acquisition. At this stage, it’s also important to consider such factors as cultural fit and various external conditions that might influence the deal’s cost and success.

For the evaluation process, experts usually use these valuation models:

  • Market value valuation

This method values the target by comparing it to a similar company that has been recently sold.

  • ROI-based valuation

This method is about the valuation of the target based on the investor’s ability to recover after the initial investment. In other words, it helps to understand the potential investment returns of a particular deal.

  • Multiple earning valuation

This method presupposes expressing the value of the target by the use of a multiple applied to the company’s earnings. For instance, a company with annual earnings of $1 million with a multiplier of x6 will be valued at $6 million. The multiplier is dependent on many factors, such as predictability or recurring revenue.

  • Discounted Cash Flow (DCF)

This is the most commonly used valuation method for evaluating the target based on its projected cash flows but adjusted to its current value.

6. Negotiating

Based on the results of the evaluation, the acquirer initiates negotiations with the target company. 

At this stage, an acquirer presents the target company with an offer that was created based on the evaluation. Both sides of the deal negotiate on the deal’s terms and conditions.

7. Initiating the due diligence process

Due diligence is an important part of mergers and acquisitions. 

Due diligence aims to verify or challenge the previous target’s assessed value. During the due diligence process, an acquirer reviews all the aspects of the target’s operations—financials, human resources, customers, assets and liabilities, tax and legal structure, etc. 

For an acquirer, this stage is about identifying how buying this particular company can help accomplish set objectives. 

8. Creating a purchase and sale agreement 

After the completion of due diligence and in case no major issues were found, the sides of the deal create the final definitive agreement. It includes details on the type of purchase agreement they’re entering (stock or asset purchase).

9. Creating the final financing strategy

As a part of the final agreement, an acquirer also creates the final financing strategy that provides details on the options for deal financing.

10. Deal closure and integration

After the official deal closure, parties can start working on the integration of the two firms into one. This takes a lot of time and planning in many areas—finances, culture, roles and responsibilities, corporate structure, etc. 

The integration of an acquirer and acquired company into one is an ongoing process that requires thorough attention and evaluation for many months and even years. Often, a merger and acquisition playbook is created for a successful integration.

10 sell-side stages of mergers and acquisitions

The phases of the sell-side process during mergers and acquisitions are the same, though the steps in each phase slightly differ from the buy-side.

Preparation and planning:

  • Defining the motive for sale
  • Documentation preparation

Evaluation and negotiation:

  • Making contact with potential buyers
  • Receiving bids and meeting interested prospective buyers
  • Receiving the LOI
  • Negotiation
  • Undergoing due diligence

Deal closure and integration:

  • Final negotiation of the terms and closing period
  • Getting the final board approval
  • Closing and complying with the terms

Now, let’s review what happens at each stage.

1. Defining the motive for sale

A clear understanding of what a potential deal can bring to the company is as crucial for the seller as it is for the buyer.

The sell-side should shape the selling strategy and objectives they want to achieve with a potential acquisition and define ideal potential buyers. 

It’s also important to be realistic and allow the company’s financial and market decisions to help drive the strategy.

2. Documentation preparation

Once confirming the interest in selling the company, the sell-side should prepare an exhaustive kit that will present the target company to the potential buyers. 

If the seller works with investment bankers, they will prepare a confidential information memorandum (CIM). A CIM is a document that comprises all the information about the company’s financials, market position, products, and services. From the CIM, the seller can extract information to create short documentation such as an executive marketing plan, teaser, or marketing materials to share with a potential buyer. 

3. Making contact with potential buyers

The seller can wait for the buyer to contact them or initiate contact.

For this, the seller usually prepares a list of ideal buyers and contacts that fit best. When being contacted, it’s also recommended to be strategic about selecting potential acquirers. Showing interest in all propositions might be a waste of time and effort, that’s why it’s better to consider only the best fits. 

4. Receiving bids and meeting interested prospective buyers

After the initial contact has been made and potential buyers have reviewed the seller’s materials, the target company starts receiving bids. At this stage, it’s important not to settle for the first offer, and sellers need to be conscious about what they share with potential buyers. 

The seller conducts management meetings with the most interested and interesting bidders and discusses the offerings and buyers’ intents.

5. Receiving the LOI 

At this stage, the target company receives letters of intent (LOIs)  from those still interested in the acquisition after initial management meetings.  

Usually, a seller receives multiple LOIs and can choose from them.

6. Negotiation 

At this stage, the seller starts negotiations with all interested buyers to select the most attractive offer.

For a target company, it’s essential to consider the M&A strategies outlined at the very first stage so that the potential deal addresses the seller’s objectives as well. 

Often, at this stage, the seller prepares a non-disclosure agreement (NDA) for the buyer to sign to proceed with the deal. This is important because during the next stage (due diligence), the seller shares confidential information with the buyer, and keeping confidentiality is essential.

7. Undergoing due diligence

During this stage, an interested buyer conducts due diligence and reviews all the seller’s documentation. The main seller’s objective at this stage is to provide the required documentation and make sure the company is ready for the deal. 

However, modern deal makers often admit that it’s beneficial for the seller to perform their due diligence before the buyer. This way, the sell-side makes sure that they have all the necessary documentation in place to reduce the possibility of complications later. 

For smooth and straightforward due diligence, deal makers typically use a virtual data room (VDR). A virtual data room provides all the necessary services that make data management and collaboration between parties easier. However, what’s even more important, VDR vendors ensure a high level of security, which is crucial when sharing sensitive corporate and financial information.

8. Final negotiation of the terms and closing period 

After the completion of due diligence and if no issues were found, the parties approach the final negotiation stage. 

It usually presupposes the negotiation of the deal terms based on the results of due diligence. The sides also define the desired closing period for the deal and outline the strategy to achieve that target.

9. Getting the final board approval

When the buyer has completed due diligence and proceeded with the deal, it’s time for the seller to get final approval from the board. Only then, the buy- and sell-side can move forward to the deal closure.

10. Closing and complying with the terms

At the closing stage, the sell- and buy-sides sign the definitive agreement, and the deal is considered closed. 

The next step is integration. This is when a seller must ensure that they comply with the terms outlined in the agreement and perform all the discussed actions. 

Possible challenges of M&A processes

Even the most well-planned process of mergers and acquisitions can result in a failed deal due to many reasons. The common challenges the deal makers should pay attention to during the M&A process include:

  • Culture clashes

The consolidation of two different companies is often challenging, as it also means uniting two different corporate cultures. For both sides of an M&A deal, it’s essential to discuss the strategy that will help to avoid cultural clashes during the post-integration phase.

  • Inadequate due diligence

Without proper due diligence, it’s impossible to fairly evaluate the target company, and the success of the deal can be at risk. Both the sell- and buy-side address this challenge seriously and ensure smooth and straightforward due diligence.

  • Poor communication

A lack of communication between the buyer and the seller can lead to a misunderstanding of the deal’s objectives.

  • Employee retention challenges

Often, the consolidation of two companies is accompanied by large employee cuts. It’s important for both sides to negotiate the steps that will be taken to make this process smoother.

  • Failed post-integration phase

The deal closure is the beginning of the long integration process, and neglecting that phase would be a mistake for both sides. The post-merger integration framework requires ongoing monitoring for a few months and even years.

  • Lack of a motive for the acquisition

The first step of the merger and acquisition process is about understanding the company’s motive for the potential deal. If it’s not clear or is defined incorrectly, the deal risks failure.

Final word

The mergers and acquisitions process is complex, and hence it’s important to thoroughly plan and perform each of the stages for the success of the deal.

The M&A process consists of the same 3 phases both for the seller and the buyer: preparation and planning, evaluation and negotiation, and deal closure and integration. However, the steps taken during each phase are slightly different for both sides.  

During the mergers and acquisitions process, lots of challenges can occur—from cultural clashes to failed post-integration. For the sell- and buy-side, it’s essential to address each of those challenges in a timely manner. 

Get more insights on mergers and acquisitions from M&A experts at mnacommunity.com.