Capturing Business Opportunity and Mitigating Risk in Buy-Side M&A Transactions
When your company is actively engaged in M&A transactions, especially acquisitions, as CFO all eyes are on you and you’re expected to accomplish a lot! You must move quickly, protect the company, be mindful of transactional opponents, manage service providers, mitigate risk, enhance ROI, successfully complete Due Diligence and close the transaction. Even before you complete the deal, you will address numerous short and long term issues, such as the likelihood of its success, future exit strategies, and more. Your CEO, Board members, and other stakeholders will be watching closely.
M&A deals move very quickly. Buy-side transparency during Due Diligence continues to be one of M&A’s greatest challenges. Despite your team’s superior efforts, you may not uncover all the risks and opportunities contained in an acquisition until after it closes. In most cases, the integration phase or sometime, thereafter is when buyers confirm whether or not their transaction achieved the objectives for which it was intended. This is much too late to make such an important determination!
During Due Diligence, leased and owned real estate are most often reviewed on little more than an environmental, compliance, or administrative basis. Typically, not much attention is paid to business risk and opportunity related to real estate until post-closing. By then, opportunity is greatly diminished or eliminated, risk has likely grown, and negotiating leverage has all but disappeared.
Waiting until integration to conduct a broader examination of real estate transaction structure could endanger underlying profits, unnecessarily increase risk in both financial and strategic acquisitions, and result in missed opportunities. Surprisingly to many executives, beneficial results are easily and quickly attainable – during Due Diligence.
Assessing Business Opportunity and Risk
Even before entering into Due Diligence, as the senior finance executive responsible for the success of your company’s M&A transaction, prudence strongly suggests that you answer these questions:
1. Have we identified the most challenging business risks that may be hidden in leased or owned real estate that will accompany the acquisition, and have we determined how to best mitigate them before closing?
2. Have we identified profit opportunities locked in real estate that can be unlocked during Due Diligence?
3. Have we structured the acquisition to adjust for the realistic costs and unknown challenges associated with disposing of surplus real estate after closing?
4. Could the acquisition become more valuable if we could leave some of the real estate behind or eliminate it from the transaction before closing?
5. Could re-negotiating the terms of leased real estate before closing generate more profits and reduce risk?
6. If the acquisition will include leasing owned real estate from the seller, how can we best mitigate risk and avoid unexpected surprises?
7. How much more operational or financial flexibility could we achieve by structuring short-term leases with the seller instead of acquiring their owned facilities?
8. Could we modify the terms of leased real estate transactions during Due Diligence to support future exit strategies?
9. How much additional risk might we be exposed to by not addressing real estate during Due Diligence?
10. What other real estate opportunities might we not be aware of?
11. Do we have the internal knowledge, expertise, and resources to identify and execute real estate solutions that can substantially enhance the transaction prior to closing?
Maximizing Leverage and Flexibility, Reducing Risk, and Capturing Profits
When it comes to M&A, the greatest real estate leverage exists during Due Diligence.
Interestingly, the relativity of leverage and risk and their intersection (Opportunity Quotient) can vary greatly from acquisition to acquisition, based on many factors.
By employing an intelligent time sensitive approach to leverage and flexibility maximization during Due Diligence, CFOs can enhance buy- side transparency, identify and capture business opportunity, uncover and reduce risk, and generate substantially greater value during the early stages of an acquisition – and most often go to the closing table with a better deal and greater profits!