A DOUBLE EDGE SWORD: RISK MANAGEMENT IN M&A

The PEO Industry has been defined by consolidation as of late, many successful mergers and acquisitions have occurred. When completed well, these transactions can provide buyers with growth opportunities and synergies, while sellers can take some monetary chips off the table. However, M&A is risky business and if not managed well on all fronts, the success of the deal can be jeopardized. This article is not a summary of ALL risk factors, but does highlight some key areas for identifying, assessing, and mitigating risks throughout the M&A process.

Let’s look at risk management within these categories:

• Strategy
• Valuation & Deal Structure
• Due Diligence
• Post Deal Management and Integration

STRATEGY
A misalignment of objectives on the part of the buyer and seller can spell disaster. Each should carefully analyze the “why” of the deal in advance of jumping into choppy and merged waters. Make a list of pros and cons of a M&A strategy versus growth via internal growth. Have your shareholders and advisors in the loop on the strategic brainstorming. Never do a deal just “because it is fashionable to do so”!

VALUATION & DEAL STRUCTURE
Valuation involves a complex review of lots of puzzle pieces; if all those puzzle pieces are not considered, the valuation can be too high or too low. Many people use third party advisors to assist so that company valuations can be in line with transactions occurring in the industry at that time. Pricing should take into account the risk inherent by the buyer and for the seller in the terms of the transaction payout. Discrepancies in valuation of the target company can lead to overpayment and financial strain on the buyer/investor. Financing should be secured in advance of stepping into the M&A world – otherwise it can disrupt the process.

DUE DILIGENCE
Thorough due diligence should assess the PEO on all fronts, think of it as a data room on steroids. A thorough review of the company’s finances, operations, legal compliance, accounting and tax, facilities, technology, and sales and marketing are just a few. Any due diligence checklist should be thorough and comprehensive.

POST DEAL MANAGEMENT AND INTEGRATION
If the entire above categories are completed understanding the risk factors, the post deal management should fulfill the original strategic objectives of a successful integration. If a deal is simply closed – but not taken under the wing of the buyer with care and caution to how to keep the very company they bought – then all can be lost.

M&A is a dynamic, complex, and ever-changing environment and process. Prudent risk management is the backbone of getting it right from strategy to close to integration. The full potential of deals can be realized when the deal creates long term value for the buyer and a smooth transition for the both seller and buyer. Want even more risk — try M&A advising for a living!