The Buyer’s Perspective: Mergers and Acquisitions in Canada

A Look into the Buy-side Process

Buying a business in the traditional sense compared to pursuing complex M&A deals obviously share differences. But there are similar processes you need to tick off your checklist. If you’d like to refresh your memory on the general buying process, you can read our buying guide. If you’re ready to tackle the buy-side M&A process, then we’ll get straight to it.

The buy-side engagement of mergers and acquisitions (M&A) is when a buyer is interested in specific targets that reach their personal and professional business goals and would like to either merge with or acquire them, depending on their strategy.

With assistance from an investment banker or advisor, a buyer will select their target, employ capital to purchase it, conduct extensive negotiations and due diligence, and discuss multiple legal, corporate, and financial issues.

Currently, the Canadian M&A landscape continues to remain stable, demonstrating a 28% jump in the third quarter of 2021, attributed to market confidence as the economy slowly recovers from COVID-19 – amongst other factors. If you’re interested in strengthening your knowledge of the general M&A process in Canada, you can read our guide on M&A.

Defining Your M&A Criteria

The search criteria for a merger or acquisition are extensions of motives behind acquiring another business. It also entails the amount you are willing and able to spend for a purchase.

If you are looking to join forces in a specific sector, you would be better off allocating your funds to the most profitable sectors in Canada, such as electric power transmission, wireless telecommunications carriers, and apartment rental.

Here are some questions you need to ask yourself:

1. What type of client base should the potential business possess?
2. What type of synergies are you searching for?
3. What should be its market share and range of products?

Remember, the more questions you ask about potential companies, the more efficient your search will be.

Making a List of Targets

Researching and selecting M&A targets is part experience, intuition, and process. Here are some tips that can help narrow down your search for potential targets to invest in.

1. Knowing how competent a business is, you can quickly figure out how the objectives of the business in question align with your vision for the future.
2. Before you can purchase a business or join hands with it, you need to be sure of its value. This is where using a reliable and practical tool to figure out whether the high-value business you are considering is worth your investment or not.

Moreover, searching for potential targets entails knowing exactly what you are looking for. It would be best if you had your strategic goals, reasons for buying, and your vision in mind.

These are all part of the M&A criteria, which help you come up with an effective plan, and ultimately narrow down the types of companies and the sectors you want to consider.

Beginning Initial Contact

This part of the process is vital and, therefore, requires proper planning and execution.

Planning the transaction

Once your M&A criteria have been defined, and potential targets have been identified, you’ll make contact with one or more targets. The reason behind these initial discussions is to attain as much data and information as possible and ascertain the business's standing. Furthermore, you can weigh the pros and cons of the potential transaction.

Initiating contact

Once you decide to contact the business you have chosen, you will get in contact with their hired banker or advisor first, who is more of a gatekeeper. This person will help you establish interest in the company and provide you with some confidential details.

You can also ask for help from a lawyer and see if the potential business is willing to talk about a takeover. If you want to approach the owner yourself, then you will have to be as transparent as possible regarding your motives without delving into too many details about the strategy of your company.

At this point, the standard procedure with companies is to sign a confidentiality agreement or an NDA, as per Canadian laws. This is because confidential information is usually exchanged to advance such discussions and decisions, without external interruptions.

Introductory meetings

Introductory meetings are a way for you to meet the people who own the business you are targeting and build a rapport. These meetings are also a great way to get a feel of the culture of the company, their past work, and rewards for employees.

Conducting Preliminary Valuations

Once you have become well-acquainted with the potential business then it is time to make an offer. However, before you can do that, you need to carry out preliminary valuations in detail to know what your investment will be worth.

After you value a business, you will be in a better position to make an offer that balances market factors, such as the multiples of EBITDA that the market is seeking for similar companies, as well as the purchase criteria. Moreover, your offer will incorporate a compromise on your behalf, along with the sellers.

The latter is especially important because no one likes to be lowballed. If you quote too low an offer, the owner may feel insulted that your valuation differs greatly from theirs. In addition, you will run the risk of them alienating themselves when making future deals.

Starting the Negotiations

After an offer has been accepted, the negotiations begin. This stage also includes drafting a letter of intent or LOI, which provides an outline for further negotiations and the final purchase agreement. An LOI generally consists of the following.

1. The range of the purchase price. However, the final number is quoted after the due diligence process has been carried out.
2. A promise from the seller to hand over all the necessary and relevant records.
3. Terms of communication and confidentiality.
4. The period for the exclusivity of negotiations, which is when the seller will agree not to consider any other offers for purchase without discussing it with the buyer first.

Remember, the final purchase price will incorporate a handful of factors, such as the business's earnings, specifically the EBITDA. Taxes, amortization, depreciation, and interest will have to be added back to the net income to figure out the business's profitability.

So, when you sit down to negotiate a business deal successfully, remember that it has to result in a mutually agreeable price.

Due Diligence

The process of due diligence is a comprehensive one, no matter which country you are in. Its primary objective is to ensure that your business evaluation is spot-on. Here are some aspects that businesses in Canada believe in reviewing.

Financial

This provides a review of the accuracy of the figures that have been provided, as well as the adjustment of the valuation of the company.

Commercial

This aspect includes examining the various assets, contracts, liabilities, customers, licenses, litigation, insurance policies, intellectual and industrial property, and data protection of the potential business, amongst other things.

Labour

This is concerned with the overall status of the employees of the target business.

Fiscal

This includes a complete review of all the financial aspects of the business you are looking to buy, and the possible contingencies associated with them.

In addition to the above, the due diligence report also indicates the possible contingencies to employ should any challenges arise once the deal is complete. These contingencies usually impact the negotiations as they lead to a lower offer.

Securing Finances

It is essential to meet with potential investors and lenders before approaching a business you are hoping to buy. Furthermore, you need to be as transparent as possible when disclosing the amount of capital you are willing and able to put in the way of purchase.

It is suggested that you involve your financial partners well in advance to ensure that they agree with your plan. You can also benefit from their expertise in the matter.

Now that the deal is done, your options of securing finance will largely consist of finalizing details related to the mutually agreed-upon price. Below are two options that you can explore for your M&A deal, which are popularly used for such purposes in Canada.

Senior debt

A senior lender provides a secured loan on the business's assets. Though the debt is not entirely secured based on the specific assets, it is referred to as senior debt due to the lender possessing the first charge against some assets, such as real estate, inventory, or accounts receivable.

Mezzanine financing

This type of financing is used to bridge any gap between the purchase price and the funds secured from other sources. This type of financing, however, entails a greater risk for the lender as opposed to the senior debt. Therefore, you will have to pay a greater interest rate, but you can reap the benefits of flexible repayment terms tailored according to your needs.

Closing the Deal

To close the deal, you will be required to put together the following documents:

1. Legal opinions
2. Operative transaction agreements, like the stock purchase agreement
3. Proof of third-party consents
4. Regulatory approvals
5. Considerations, such as cash or stock
6. Binding offer
7. Terms of payment transfer
8. Ancillary agreements

Once you reach this step, you can now begin the integration phase. Remember to use a post-merger checklist to aid you with the process.

Final Thoughts

To ensure that the process of you acquiring or merging with another business is smooth and seamless, you’ll need expert advice, and you will need to conduct extensive research on your targets. You’ll also need to be secure in your decision, both personally and financially. It may be useful to conduct research on the seller’s perspective, for a more holistic understanding of the M&A process.

You can use our services to establish a relationship with potential targets, advisors, and other avenues of support. For more information on the process, or for further assistance in your purchasing journey, feel free to contact us.