Accurately Plan for M&A Costs in your Due Diligence

Author

Liberty Advisor Group

Prior to the disruption of markets by COVID-19, global mergers and acquisitions had topped the $3 trillion mark for the sixth year running[1]. But, by April 2020, worldwide M&A value had toppled to its lowest monthly value since August 2003[2]. Divestment deals also took a hit which saw 63% of corporations that had sold off business units in the first half of 2020 struggling with underperformance[3].

Which costs do you need to be aware of? And how can you ensure that you’re not leaving money on the table as a seller or paying too much as the buyer?

Transition Service Agreement Costs

Transition Services Agreement (TSA) is defined as a :

“…type of agreement that is made between the buyer and seller of a company. In this arrangement, the seller agrees to provide certain services to the buyer at a predetermined price.[4]”

A TSA is often a necessity as the buyer may lack the necessary skills and resources to take-over operations immediately. In this regard, they have the need for the seller’s expertise until they put in place their own team. TSAs provide the buyer with the infrastructure and operational support, for example, vendor support agreements, break/fix issue resolution, and end-user device management.

When executed correctly, we have seen TSAs assist with smoother transitions: Transition services agreements can be laborious and require time spent on an entity that’s no longer part of their business. TSAs are necessary if when taking on a large-scale, complex M&A with heavily integrated segments of the business.

When working with our advisors, our goal is to help you streamline integration and separationWe guide you on the best practices surrounding TSA structuring and implementation.

Separation Costs

One of the most overlooked financial aspects of the M&A process regards separation costs.

When talking to clients, we often find they are well-versed in M&A pre-close and post-close costs, however, they somehow forget to factor in the fees of the people helping them through the deal – i.e. separation costs.

Separation costs or one-time costs can add up very quickly and become a stumbling block if not carefully planned for.

When we talk of separation costs, these are professional fees for the various professionals you will engage during the course of your divestiture.

You’re looking here at:

    • Advisory fees
    • Breakage fees
    • Debt servicing fees
    • HR fees
    • Integration advisory fees
    • Legal fees
    • IT and technology fees
    • Rebranding fees

In fact, any fee that you have to pay to access the services of a professional in the course of your M&A can be included in the itinerary of one-time costs.

Operating Expenses (OPEX)

Every business regardless of size has operating expenses (OPEX) that the buyer must be fully aware of. But just what are operating expenses?

OPEX is:

“….an expense a business incurs through its normal business operations. These expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development [5].”

Operating expenses affect the bottom line and profitability of a company. Buyers will be interested in knowing why business units they are interested in acquiring have high expenditures and whether or not this is an underlying reason for the divestiture. We encourage buyers to analyze operating expenses and ask probing questions about this very important financial aspect of the asset they wish to acquire.

Standalone Costs

Following on the heels of TSA, one-time costs, and operating expenses, an additional liability that our advisors have to bring to the attention of buyers and sellers is standalone cost

This is simply the recurring cost of running a particular divested business unit. Standalone costs are applicable to both the buyer and the seller as they represent the cost profile post separation. Both entities will have new footprints, and both entities will have new associated cost structures for which to plan. Knowing about these costs will facilitate a streamlined Day One and help move integration along the right path.

The seller can provide the buyer with the basis for current cost figures, but go-forward planning will be the responsibility of both the buyer and seller for their respective companies.

Stranded Costs

As the name implies, stranded costs are the recurring operating expenses that remain with the seller even after the divested business asset has been sold off and is no longer a part of their company. This is a financial consideration often overlooked during the planning phase of a strategic divestiture is that of stranded cost. This silent killer cost analysis should be conducted during any divestiture.

During separation planning, each individual function should perform stranded cost analysis and develop action plans to achieve post-separation Run targets. Primary focus areas within IT include:

    • Applications
    • Infrastructure & Depreciation
    • EUS (End-User Services)
    • Resources
    • Transformation Initiatives
    • Commercial Agreements with suppliers [6]

How to calculate stranded costs?

Stranded costs = Current market value of the asset in its productive employment – Historical cost of the asset depreciated through time

If you would like a seasoned advisor to further explain and help you work out your stranded costs, please contact us.

The Importance of Working With M&A Carve-Out Professionals

Having a neutral, experienced group of advisors on your side who can assess risk, propose practical solutions, and provide a invaluable skill that is crucial for success.

M&A deals are fast-paced with small carve-outs closing within 6 months of announcement. The work to prepare for and execute an effective separation commences several months prior to any deal announcement.

Our services are based on decades of experience with speed and efficiency in mind so you can achieve quicker value realization and eliminate needless noise.

By bringing on board the right seasoned consultants and strategists with deep industry and operational excellence, you stand to benefit a lot in terms of awareness and planning for costs.

Preparation Vital For Success

Value creation in divestitures and M&As is two-fold. It is as much about cost reduction as it is income generation. For this reason, working with a trusted team of advisors cannot be an oversight.

At Liberty Advisor Group, we understand the fast-paced nature of M&A deals: We accelerate timelines for quicker value realization. Using the power of technology, we grow investments and improve valuation. Our team of senior technologists and business operators understand the importance of top line growth and bottom-line efficiency:

ABOUT LIBERTY ADVISOR GROUP

Liberty Advisor Group is a goal-oriented, client-focused, and results-driven consulting firm. We are a lean, handpicked team of strategists, technologists, and entrepreneurs – battle-tested experts with a steadfast, start-up attitude. We collaborate, integrate, and ideate in real-time with our clients to deliver situation-specific solutions that work. Liberty Advisor Group has the experience to realize our clients’ highest ambitions. Liberty has been named as Great Place to Work, to the Best Places to Work in Chicago,and to FORTUNE’s list of Best Workplaces in Consulting and Professional Services.

Sources

  1. http://www.lexology.com/library/detail.aspx?g=ff151b77-fab9-4f11-bd45-37e33f293581
  2. http://www.financierworldwide.com/off-the-ropes-ma-rebounds-after-pandemic-slowdown#.YFTkeVVKjIU
  3. http://www.globenewswire.com/news-release/2020/09/09/2091025/0/en/Divestment-activity-poised-for-rebound-as-companies-look-beyond-COVID-19.html
  4. http://www.divestopedia.com/definition/888/transitional-service-agreement-tsa
  5. http://www.investopedia.com/terms/o/operating_expense.asp
  1. /insight/stranded-cost-analysis-for-mergers/

Author

Liberty Advisor Group

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