The M&A Process 101 for Startups

Just like any other, M&A is a sector with its own vocabulary, specific terms and other acronyms. Most often, the activity itself of the investment banker already seems quite nebulous to the uninitiated quidam. M&A or "Mergers & Acquisitions" is a term used to describe a transaction in which a company is absorbed (aka acquired) by another company or merges with it. It is also the term that designates the profession of mergers and acquisitions advisor, also called investment banker. And more globally, it encompasses the strategy and processes that underlie the external growth of a company, which also includes Strategic Alliances.

Same as when you start a new activity, whether it be sailing or playing an instrument, learning the language is a mandatory prerequisite so you can be done with it and move on to more interesting steps. Terms can be related to documents, milestones in the M&A process or the role of each person involved in a transaction behind their title.

The objective here is not to go through an advanced and boring list of definitions, but more follow the major acquisition steps and highlight the main terms you will encounter frequently when having M&A conversations.

1. The Sales Agreement 

The official starting point. Unofficially, discussions between the seller and potential buyers have been going on earlier in time. A Sales Agreement (or Business Purchase) necessarily implies the exchange of numerous documents. It aims at defining the intent of the acquisition, its financial conditions and first legal frame.

NDA / Non Disclosure Agreement: confidentiality statement. In this contract, the parties confirm that they will not disseminate information exchanged as part of the acquisition negotiations. An NDA often includes other clauses, such as the employee non-solicitation, jurisdiction in case of dispute or an injunction clause.

Offer Letter: letter of offer in which the intention to purchase is mentioned, which is generally not legally binding, we then speak of a "Non-Binding Offer".

LOI/Letter Of Intent: declaration of intent. This term is used to refer to the first written declaration of the intentions of the parties. In general, this is nothing more than an intention to continue negotiations with only two binding clauses, namely confidentiality and sometimes exclusivity.

Non-Binding Agreement: the binding nature of a clause or of the entire agreement is an important point when drafting the document that the two parties exchange. In the very first phase, we often opt for non-binding declarations which are transformed into more binding declarations/documents as the sale process progresses.

Antitrust Filing: announcement of the acquisition to the competition regulatory authorities.

Closing agreement: expression of the finalization of the agreement when the conditions have been met. It is on the basis of this document that the transfer of ownership and payment take place.

2. The Guarantee Clauses

Once the general frame has been set and agreed on, parties move to more details. An important part of the negotiations concerns the guarantee clauses which confer on the acquirer legal guarantees when buying shares as well as other more explicit and more extensive guarantees.

Warranties: or general warranties. The seller not only makes statements but also warrants their accuracy. These guarantees may be limited in time and for a defined amount.

Escrow: amount that is deposited in a blocked bank account as a guarantee for any damage to be compensated.

Bank guarantee: this is the guarantee given by the bank to ensure that any damage will be compensated. If the seller does not pay what is claimed, the bank, after certain conditions have been met, will replace the seller and then turn against him. The banks are remunerated for such a guarantee.

Disclosures: communications. It is a list of elements that the seller communicates to potential buyers in order to avoid subsequent discussions on the question of whether or not certain data has been communicated during the negotiations. It is therefore important to clearly define whether these disclosures have an impact on warranties. 

3. The Transaction - buyer’s point of view

The sale process from the buyer’s point of view means that the acquirer wants to have a good understanding of the company he is acquiring, both in terms of risks and opportunities. Due diligence, a review often referred to as a “review of the books” or “prudent review,” has several distinct components that you need to be aware of. 

Financial due diligence: review of historical figures and financial projections of the company. We often focus on the quality of earnings (the robustness of historical results), the quality of net debt (what are the elements to be taken into consideration for determining net financial debt?).

Tax due diligence: examination of the historical and projected tax situation and the risks incurred by the company(ies), both in terms of direct and indirect taxes.

Legal due diligence: examination of the legal situation of the company with regard to company law, control of contracts, social law, intellectual property (Intellectual Property, IP), authorizations, etc.

Commercial due diligence: the examination of the markets in which the company operates and the commercial position of the company. 

Operations and synergy due diligence: examination of the efficiency of operations and the possibility of synergies between the acquirer and its target.

NB: Due diligence reviews can be very thorough and also study company pension plans, existing insurance coverage, working conditions, etc.

Data room: the virtual data room is the place where certain data relating to the company is collected. By giving potential buyers (and their advisors) access to this place, they can read these documents and build an image of the company. Consultation of a data room is governed by a complex set of rights and permissions so that each user invited can only do what they should.

4. The Transaction - seller's point of view 

The sales process from the seller's point of view follows a sequence of phases during which, from a long list, a short list of candidates is first drawn up. These candidates receive a teaser and, after signing an NDA, an info memo and a process letter. Based on the offer letters obtained, we decide who to give access to the data room and possibly to the VDD report.

Long list: the initial "long list" of potential buyers of the company.

Short list: the “short list” of companies which, in a first phase, will be contacted so that their interest is sounded out. The short list is often made from a long list selection. 

Teaser/Blind profile: the anonymous profile of the business for sale that is sent to potential buyers. It is a question of inquiring if such a purchase can interest them, without revealing the identity of the company.

Info Memo/Information Memorandum/IM: information memorandum. After the potential buyer has signed an NDA, they are sent an info memo and a process letter. The info memo is a document which describes the company and which, in addition to a good summary, contains in particular the following information: the history of the company, a description of its products and services, its position on the market , its management, financial information, etc.

Process letter: the process letter contains information on how the seller intends to organize the sales process, i.e. by which deadline an offer is expected, the formal requirements that the offer must meet and what the next phase will consist of.

VDD/Vendor (initiated) Due Diligence: A vendor due diligence is a factual due diligence analysis performed by an independent party (often the specialized division of an audit firm or a law firm) whose initial principal is the seller.

5. Advisors 

During a transaction, advisors support their client and provide certain services. The following classic roles and remunerations can be distinguished: 

Deal advisor: the advisor (often an investment bank or a corporate finance institution) acts as a broker, which means that he seeks out the parties and puts them in contact, that he conducts and organizes negotiations and that he draws up the various non-legal sales documents (Teaser, Info Memo, Process letter).

Due diligence provider: providers specializing in due diligence assistance, often specialized divisions of audit firms or law firms (see also Due diligence).

Lawyer/M&A lawyer: specialized lawyers or corporate lawyers who draw up and negotiate contracts.

List of parties: a list of parties is drawn up in order to have a clear overview of the advisers and members of the management of the buying and selling parties. This list includes the contact details of the various people who are involved in the transaction.

Fees: remuneration of the "deal advisor" generally consists of two parts, the retainer and the success fee. The fees of other advisers are often based on the time spent and the costs generated (time and expense based).

Success fee: part of the remuneration that depends on the conclusion of the transaction.

Retainer fee: the fixed or monthly remuneration which is allocated independently of the completion of the transaction.

Fairness opinion: additional judgment of an independent expert as to the value of a company or in relation to the underlying valuation assumptions. An expert can write a report and assess whether the terms of the transaction, primarily the price, match the underlying value of the business.