How to achieve a smooth business merger

Following Gardner Leader’s recent merger with commercial law specialists Clark Holt, Business Leader spoke to Philip Humphreys (a corporate lawyer with over 30 years’ M&A experience and previously the Managing Partner of Clark Holt) to learn more about the legal and operational aspects business owners should consider before and during a merger.

Whether contemplating a merger or about to embark on one, for many business owners the entire process can seem daunting and complex. In many cases, it is likely to be the most important commercial decision of a business owner’s life and something they only do once. It therefore needs to be done right. Key considerations for business owners include: the timing; the partner best suited to merge with; and how to ensure the process runs smoothly.

It is unlikely that there will be just one factor that will determine when is the right time to merge. It could be that an offer is too good financially to turn down or, at the other end of the scale, that there is no alternative option for the business owner to be able to otherwise carry on. However, in most cases, the decision is a far more nuanced one.  Unless a business owner is only interested in organic evolution, an exit strategy should be an integral part of any owner’s business plan. A failure to have a plan probably means that you only have a “lifestyle business” (however hard you work!). The key is to be clear on your business vision, purpose and objectives for wanting to merge and then to establish if joining forces with a potential suitor will achieve those goals. If you don’t know what you want to achieve then how will potential merger partners possibly understand?

When looking at Clark Holt’s own recent merger with Gardner Leader, we had the distinct benefit of having worked alongside each other over more than a dozen years.  We already knew and liked each other; if we were ever going to merge, they were the most natural fit. The ethos, people, clients and geography were obvious benefits for the combined firm. When Gardner Leader’s Managing Partner initiated the conversation, the time instinctively felt right.  For the Partners at Gardner Leader, their aim wasn’t about growth for growth’s sake but rather to ensure that the firm had the infrastructure and resources to build the business that they wanted, to stay independent, and to offer a realistic alternative to larger firms for both clients and staff.

The most successful negotiations normally involve a degree of give and take. If one party feels that it has had a raw deal, then this doesn’t bode well for working together post-completion. Inevitably, if one party is significantly smaller, compromises are likely to be needed. However, as has been the case with our merger, there was a ready acceptance that there were practices and aspects from both firms that would benefit the combined entity and it was important that this was communicated to all those involved. This, of course, is not always the case and purchasers sometimes fail to recognise some of the reasons why a business they have just bought was such a success and why they were interested in them in the first place.

Apart from the obvious financial benefits for the business owners, with a successful merger there are likely to be more opportunities for the enlarged entity, with greater scope for expansion and access to capital. It may open up different markets, give rise to a wider offering of services and enhanced investment opportunities. Employees may also have the chance to take on new roles (or dispense with old ones) and benefit from different career pathways.

Aligning people and culture

Get the ethos and culture right’ is easy to say but can be a lot harder to achieve in reality. However, various common factors are worth noting:

  • Recognise that some employees are going to feel unsettled. Clients too will need to understand the rationale behind the merger and be confident that they will be looked after.
  • Communication and involvement at all levels is key.
  • Give the team time to get embedded and let them know this at all levels.
  • Recognise that there are going to be challenges; it definitely won’t all work smoothly from day one. Be realistic.
  • Make people feel their views count and actively demonstrate this is the case; don’t just pay lip-service to this.

Be prepared

If you fail to prepare for your merger, then prepare to fail. Those business owners that take time to think about and then decide to actively plan for the exit of their business will be better prepared and ultimately get a higher price.

If you want to maximise the potential within your business, it is important to keep your ‘house in order’. There will always be competing calls on a new company’s perhaps limited budget. However, the downside of, for example, not having a Shareholders Agreement in place or having terms and conditions that are not fit for purpose can have a severe detrimental effect down the line.

If an opportunity does arise, both sides should ensure they carry out their own due diligence on the other party. Providing clear and accurate information to the other party will demonstrate that you are a well-run business. Wherever possible, do your best to ensure that there are no hidden “nasties” or liabilities which could impact on the price. For example, you will want to resolve any litigation claims, make sure the share registers are in order and that any tax investigations are complete.

How long will it take?

No one can predict with any certainty how long the process will take. However, you need to be realistic. For example, it would not be at all surprising if it took at least 24 months to prepare, find a partner, agree terms and then complete the deal. Consider also any time a business owner is going to need to be engaged in the combined business post-completion earn out period which can be typically up to 36 months to ensure the maximum attainable purchase price is achieved.

Communicating the news

Most of the early discussions take place in confidence with a very select group of people. At some point, it’s likely that others in the senior management team will need to be involved. Brief them clearly and prepare to allay any concerns, whether that’s regarding their own roles, workplace or position in the team.

When it’s time to communicate to the wider workforce and clients, ensure that both sides have a clear and consistent message with a process for addressing questions.

There are always challenges with every merger and it would be surprising if there was not at least some resistance to change. Giving people the opportunity to voice questions or concerns, and ensuring that those in charge demonstrably show they are prepared to listen is crucial. Regularly communicating throughout the process and beyond will help bring your new, combined workforce together for the future prosperity of the business.