Doing deals: A Dutch view of pitfalls in the current global economic climate

That the current global economic climate is unstable is not in doubt. The aftermath of Covid-19, war in Ukraine, high inflation and instability in financial markets has led to the borrowing of money being more difficult and expensive. This in turn affects the possibility of prospective purchasers to leverage their M&A transactions.

While the M&A sector is still going strong, deals are being looked at by prospective purchasers with more scrutiny: with EBITDA (earnings before interest, taxes, depreciation and amortisation) multiples being scrutinised. This is in large part due to the fact that deals cannot be leveraged as easily. Hence, when shareholders are looking to exit their position in a company or are looking to sell the company entirely, it is important that the target company is showcased as best as possible. This can be done by planning the transaction process in detail and by making sure that certain pitfalls are carefully manoeuvred.

Preparing your due diligence investigation properly

For sellers, the due diligence investigation with the corresponding Q&A is usually considered a hassle. But if they properly prepare, it can provide an interesting insight into the target company and consequently can be a valuable tool for sellers.

Taking the preparation of the due diligence seriously will result in a number of benefits. The first is that the sellers may become aware of skeletons in the closet before the transaction process. This has the advantage of allowing the sellers to remedy the issues in full or present prospective purchasers with tailored solutions. This in turn has a positive effect on the valuation of the target company.

The second benefit is that the prospective purchaser can perform a much faster due diligence investigation with fewer questions needing to be asked. This can be especially important when considering an auction sale of the target company, whereby a number of prospective purchasers will be performing their due diligence investigation in parallel. Such a parallel due diligence investigation, and the Q&A that accompany it, can be a drain on the target company from a management perspective.  

An even more extensive preparation (which is becoming increasingly popular) is the use of vendor due diligence reports. Depending on the size and structure of the target company and the transaction process (initiation of a private sale or controlled auction sale), they can have a catalytic effect on the transaction as the prospective purchaser is spoon-fed the relevant legal information. Potential issues of the target company can be explained properly and the proposed solutions set out in sufficient detail. Especially in larger transactions, a vendor due diligence can speed up the process and allow for a level playing field between prospective purchasers.

Lining up your team and keeping momentum

Each transaction moves at a different pace, depending on the needs of the parties. It is crucial for parties to have a mutual understanding on the pace of the transaction and agree on a corresponding timeline. That way, legal documentation and closing actions can be prepared as needed and parties can avoid unnecessary delays.

Each M&A transaction will have its own peculiarities and issues and tackling these swiftly is vital because delay can seriously affect the likelihood of the transaction closing successfully. Together with an appropriate timeline, and in order to keep the pace, it is important that the stakeholders are aligned and available if decisions need to be made.

The sellers will also need to have capable advisors engaged and ready so that any issues can be tackled as soon as possible. More often than not, the sellers will also need support from within the organisation of the target company. This can be a sensitive issue as it is possible that the proposed transaction is confidential and not known about among the employees of the target company. That is why it is vital for the sellers to have a deal team of key employees in place at the beginning of the transaction. That way, the flow of information during the due diligence investigation can be as fast as possible and pre-closing actions and issues can be tackled efficiently.

ESG aspects are becoming increasingly important

Recent M&A studies show that environmental, social and governance (ESG) aspects of the target company are becoming more and more important and are becoming a key value driver.

Generally speaking ESG is a matter which should be at the top of the target company's agenda, but a possible transaction can renew interest in the ESG aspects of the target company. Taking care of the ESG aspects is not a one-size-fits-all approach. Each target company will require a tailored solution to make sure that its legal structure and policies are in place. 

As the ESG playing field is in continuous motion, the work on this will never be truly complete. However, if the sellers can demonstrate that it is a true priority for the target company, the target company will be more attractive to prospective purchasers. The target company will need to pay regular attention to ESG aspects and liaise with specialists in each jurisdiction in which it is active.

Osborne Clarke comment

Despite the current trouble in the financial markets, the M&A sector remains very active and allows for interesting transactions to take place. Shareholders who are interested in selling a target company in principle have little to worry about if the deal is properly managed. They need to make sure that they are fully prepared for the due diligence investigation, that the deal maintains the proper pace and that ESG aspects (as a potential key value driver) have received the appropriate attention. When a deal has been well prepared and the sellers and the purchasers have engaged advisors with experience in the relevant sectors, 2023 could be an excellent year to realise an exit.