How to Overcome M&A Hurdles

Mergers and acquisitions (M&A) is a long and tedious process filled with challenges and surprises that could harm the acquiring company or destroy the deal altogether. To ensure a successful transaction, it's crucial to identify and overcome these hurdles. In this article, we'll discuss the most common M&A challenges and the best approach to overcome them, featuring Ritika Butani, Head of Corporate Development at Toast.

"You need to be empathetic, tactical, and direct when addressing issues with the target company, and adopt a collaborative approach rather than just laying down all the issues." - Ritika Butani

Common Challenges in M&A

The most common M&A hurdles usually come from CEOs and founders who think they can do everything. Managing everything without any experts involved will result in errors. Here are some of them:

1. Tax Issues - One of the most common issues in M&A is tax, especially for private companies and startups. When the target company has cross-border operations, tax tends to get complicated. Also, smaller companies do not take tax very seriously, which poses a problem for acquirers. The worst thing about tax issues is that they get compounded, resulting in massive amounts of penalties. 

2. HR Issues - Private companies, especially startups, are only interested in hiring the best talent fast without a mature HR policy in place. This creates a lot of exposure because of poor hiring processes when it comes to employment. The most common HR issue comes from employee misclassification, lack of proper employee agreement contracts, and employee location issues due to the hybrid work setup. 

3. Contractual Issues - Many times, a company cannot function properly without key vendors or contracts in place. Because of this, buyers must ensure that all contracts are transferable once the deal is closed. Moreover, there could be provisions and terms that the target company has agreed to that is not acceptable to public companies. These must all be identified and renegotiated before closing the deal. 

4. Accounting Issues - Most startups have messy corporate accounting. Buyers must ensure that they are accurate and audited during the confirmatory due diligence process, by creating a quality of earnings report. 

5. Cultural Issues - Every deal has cultural risks. Buyers will have to ensure that the cultural gap between both parties must not be too significant. Otherwise, the business will suffer. Perform cultural diligence early in the process, and perform post-close surveys to monitor employee experience and satisfaction. 

Principles of Doing Deals

Ritika has 3 principles when it comes to M&A, and all must be true before pursuing a deal. 

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1. Deal Thesis - The deal thesis is the entire reason for the acquisition. If it’s no longer true, then the deal makes no sense. 

2. Financial Health - The target company must be in good business health. If the business is losing customers or experiencing higher churn than expected, the deal will be reassessed at a lower valuation or they may walk away completely from the deal. 

3. The Team - Business continuity is crucial during M&A. The acquired team must be willing to stay for the deal to be fruitful. Otherwise, the deal will not be as valuable, as rehiring and retraining people will take time and will delay synergy realization. 

Dealing With Issues

Every deal will have challenges. According to Ritika, the key is to stay calm and move forward. Avoid being too emotional when dealing with problems. Stick to the non-negotiables and the deal thesis of the company. 

Also, be empathetic when communicating issues with the seller. The business is their life’s work, and listing down everything wrong with their business might startle them. Break down the news tactically and directly, while offering them help and solutions. Having a collaborative approach to solving issues will help both companies.

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