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20 Ways To Mitigate M&A Financial Risks Thumbnail

20 Ways To Mitigate M&A Financial Risks


While mergers and acquisitions (M&A) can lead to business growth when done correctly, they come with financial implications that can significantly impact the involved entities. From the onset, these transactions can affect capital structure, liquidity and the balance sheet of both acquiring and acquired companies, potentially altering their financial health and operational strategies.

Business leaders on both sides of an M&A deal must navigate these waters carefully with thorough due diligence, strategic planning and risk assessment to ensure a successful integration. To help, Forbes Finance Council members delve into the financial challenges of M&A activities and provide insights for effectively mitigating these risks.

1. Conduct An Asset Review

Mergers and acquisitions can dilute capital ratios, straining financial health. Integrating lower-quality assets poses even greater risks. Business leaders can mitigate this by conducting thorough, in-depth asset reviews to understand the impact on financial stability and strength on the business' capital position. - Luke Billeri, Members Choice Credit Union

2. Integrate ESG Due Diligence

One consideration for risk mitigation is the continuous integration of ESG factors into deal due diligence. As we see greater standardization across global frameworks, there will be a more universal and consistent approach to evaluating ESG factors and their relevance in any deal. At Enzo, we now formally conduct ESG fairness opinions assessing these risks and providing plans for mitigation. - Nidhi Chadda, Enzo Advisors

3. Communicate With Employees

One implication from a staffing perspective is the potential impact on employee morale and retention. The integration of new teams or changes in leadership can create uncertainty, leading to a dip in productivity. To mitigate this, executives should prioritize internal communication, as I have in the past by ensuring employees are informed about the reasons and benefits behind the merger. - Crystal Gilmore, The Spearhead Group Inc

4. Plan Ahead With An Internal Team

The way to mitigate the risk is planning and due diligence. Having a good external set of due diligence providers across finance, tax and legal to identify and flag issues is key. Alongside this, it is vital to have key members of your internal team involved with the diligence and planning for the value that can be delivered against the acquisition. - Andrew Collis, Moneypenny

5. Expect To Spend

The time and cost of integration of an acquisition is often underestimated. To get it right, a dedicated group of both leaders and individual contributors will need to work with the acquired company to get it up to speed on technology, process and most importantly, culture. This is a big effort that will cost money—be prepared for that spending. - Jamie Ellis, Katz, Sapper & Miller

6. Ensure Compliance By Auditing Internal Controls

Becoming noncompliant is one of the largest risks during M&As. CEOs must work closely with CFOs to manage the inbound system of financial controls, working with independent auditors to review internal controls and procedures to ensure they operate as planned. This is particularly important for publicly traded companies acquiring private companies that have not dealt with SOX compliance. - Mike Whitmire, FloQast

7. Consider The Cultural Fit

A major financial implication of M&A is whether or not the integration is set up to work in the long term. The impact of a short-lived, unsuccessful merger could be detrimental to all involved parties. A key, and often overlooked, consideration is to deeply examine if both parties are a cultural fit. Investing time to understand this can provide invaluable insights early in the process. - Amanda Eisel, Zelis

8. Shield Against Seller Liabilities

One key financial implication relates to undisclosed seller liabilities. These liabilities can relate to various types of pending litigation, supplier, vendor or warranty claims or the inability to assign key contracts. Representation and warranty insurance coverage can be purchased as protection from financial loss if misrepresentations or inaccuracies in representations or warranties occur. - David Samuels, DrFirst, Inc.

9. Have A Well-Thought-Out Plan In Place

Mergers and acquisitions are intended to bring about economies of scale or synergies between organizations but are then left with multiple processes, systems and controls, and the economic benefits are not fully realized. The importance of a robust, well-thought-out and well-executed integration plan cannot be underestimated. It can be the difference of seeing any ROI on the transaction. - Shannon Power, Scope AR

10. Enlist The Help Of A Certified Exit Planner

Most business owners don’t plan ahead, leading to financial implications like less money, lost employees, unnecessary taxes and suboptimal deal structures. Mitigate risk in advance by working with a Certified Exit Planner to design your exit strategy. Understanding your financial needs and identifying gaps will help to improve your chances for a smooth business transition. - Tammy Trenta, Family Financial LLC

11. Avoid Legal Challenges With Compliance Assessments

M&A transactions can face regulatory scrutiny and legal challenges, which can result in additional costs, delays or even deal cancellation. Business leaders can mitigate risks by engaging in thorough compliance assessments, involving legal counsel early in the transaction and maintaining open communication with regulatory authorities to proactively address concerns. - Simone Grimes, Simone Grimes

12. Protect Your Employees’ Jobs

Good business is highly dependent on employees familiar with each company. Care should be taken to protect employees who are often laid off as part of many M&A transactions due to redundancy. A pro-employee movement called ROI: Return on Individuals provides guidance to business leaders. There should be an awareness that there is a risk of mismanaging human capital. - Dave Sackett, Persimmon Technologies Corporation

13. Understand The Value Of The Business

A critical initial step is to understand what you are buying and how it fits into your overall strategy. Value creation via M&A hinges on the potential to grow the acquired business, and that determination can't be made in isolation. Having a diverse team engaged throughout the deal's duration is crucial to confirm that your investment aligns with the strategy and secures the expected benefits. - Parth Kulkarni, Adobe

14. Carefully Review The Business’s Integration

When companies are assessing M&A opportunities, there must be careful and detailed consideration of business integration and overlap with regard to capital structure and balance sheet positioning. This can often be misjudged due to a lack of adequate analysis and scenario planning, especially in times of heightened macro volatility and greater geopolitical risk. - Manoj Jain, Maso Capital

15. Create An Integration Plan

M&A can drive synergies and economies of scale by integrating systems and infrastructure to achieve higher margins and enhance profitability. Integration risks can be alleviated with thorough due diligence before the transaction and a robust integration plan that ensures execution is smooth and successful. - Greg Bassuk, AXS Investments

16. Don’t Overlook Financing

M&As can lead to higher debt, affecting liquidity and credit ratings. To minimize risks, leaders should conduct detailed due diligence on the target's finances and liabilities, create a clear integration plan aligned with strategic goals for achievable synergies and maintain a balanced capital structure while securing favorable financing terms. - Elie Nour, NOUR PRIVATE WEALTH

17. Ensure Immediate Cash Management Oversight

“Assume the checkbook” immediately to avoid surprises down the road. Ensuring immediate cash management oversight and controls over the acquired entity—both their banking and key vendor relationships—is essential to mitigating risks. - Omar Choucair, Trintech

18. Understand The Terms Of Debt Assumptions

A significant implication of M&A is the potential for increased debt. When a company acquires another, it often takes on the target company's debts, which can strain financial resources. To mitigate this risk, CFOs should conduct due diligence, assess financial health, negotiate terms for debt assumption and realize synergies. A strong cash reserve and managing post-M&A cash flows can also help. - Ali Firoozi, The PAC Group

19. Form An Integration Team

Build a cross-functional integration team with members of legal, finance, business, IT and people teams for a broad perspective of all elements of proposed M&A activity. Think about how all the elements of targets or acquirers will impact operations, including any hidden costs of bringing two organizations together like duplication of personnel, systems or other things that erode synergies. - Michelle DeBella, JumpCloud

20. Conduct A Post-Merger Financial Analysis

In M&A, a less obvious potential financial impact is the integration costs that can surface down the line. To counter this, leaders should embrace a three-pronged approach: conduct comprehensive due diligence, engage in strategic planning and perform detailed post-merger financial analysis. This can result in a seamless transition while unlocking the full value of the merger. - Julio Gonzalez, Engineered Tax Services Inc.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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