Spring 2010 issue of Horizons

GENERAL TOPICS

The Transaction Process: More Than Just the Numbers With all the changes in the economy and the cautious nature in which businesses are evaluating their futures, the mergers and acquisitions market has been relatively inactive. Now that the economy is stabilizing and businesses are looking to buy or sell companies, activity is beginning to increase. We may not see the activity levels of the past, but we will see a new “normal” develop. As part of the new normal, companies will need to modify their expectations on the amount of leverage that can be used to finance a transaction, and there will be a corresponding shift in the multiples that are paid for businesses. In addition, the overall approach that companies use in evaluating and assessing potential acquisitions is shifting. One of the areas that is experiencing a fair amount of change is the due diligence process. By Dan Raskas

seeing and will continue to see this phase expand and become even more important.

The traditional transaction process starts with a strategic business decision to pursue the acquisition of a company. Meetings are held and information is gathered about the prospective seller. At some point in the process, a decision is made to move forward, and typically a letter of intent will be executed. At this point the due diligence phase begins, with the primary purpose of looking into the details of a business to ensure the purchaser is buying what they think they are buying. This process has several major components that will dictate the level of effort and depth of analysis. Historically, these components focused on risk from a legal perspective and financials from a historic performance perspective. While there were elements of future earnings and accretive benefits, a disproportionate amount of time was spent looking at past performance as an indicator of future success. At the conclusion of due diligence, a decision is made to continue the acquisition process or to withdraw. The information learned from due diligence also influences the content of the definitive agreement as the process continues. Once a definitive agreement is executed and financing has been finalized, the transaction will close on the date specified. The process described above worked well for many years; however, changes to the process started as the economy began to shift. The primary changes have occurred in the early transaction stage through due diligence. The amount of planning, analysis and forecasting has seen much more emphasis than what was once the norm. One of the biggest drivers for the change has been limited access to the capital needed to fund a transaction.

While the due diligence phase of the transaction process always has been a critical step, we are

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