Mergers and acquisitions (M&A) are a tricky business—getting the process right can be a significant challenge, regardless of the size of the organizations joining together. It’s one that even established enterprise firms can fumble, let alone small to medium-sized companies that have less experience and fewer resources to clear the many hurdles that emerge when negotiating the sale or merger of their company.
The recent merger between the Professional Golfers’ Association (PGA) and LIV Golf (LIV) offers some important lessons for SMEs that underscore the need for due diligence, the support of qualified professionals and careful reflection before taking the M&A plunge. In this case, the merger aims to create a more unified and powerful entity in the golf industry, creating a for-profit company that combines the organizations’ commercial operations.
Yet news of the deal caused uproar inside and outside of the industry, faces scrutiny and resistance from various quarters, as well as regulatory and competition concerns that still need to be addressed before any deal is finalized. It caused widespread consternation, posed risks, generated anxiety and presented lucrative new opportunities to those involved. In other words, it was your typical M&A deal, only on a much grander scale and on an international stage.
Two organizations, two competing goals
Why? The PGA is a well-established and highly respected organization that has long been the dominant brand in golf. By contrast, LIV is an upstart player, funded by Saudi Arabia’s Public Investment Fund and known for spending extraordinary sums in order to attract some of golf’s top players to play in its novel tournament series.
One of the primary challenges of this merger centres around consolidation of power and the Saudi human rights record. Many critics have accused the Saudis of ‘sportswashing’ in order to help bolster the country’s global image. The PGA is seen as striving to protect its grip on the sport. The potential impact on the PGA brand and players looms large because—and despite the carefully-crafted communications that positions the merger as a joining of two equal partners—the Saudis are essentially buying golf as an enterprise and will have de facto control over the sport if the deal proceeds.
For the merger to succeed, support must come from the merging organizations’ various stakeholders, including golf professionals, sponsors and fans. Many of the players who originally stayed with the PGA (and passed up a lot of money to do so) felt betrayed when the deal was signed and sprung on them without notice—primarily because the PGA could no longer afford to fight impending lawsuits. The PGA and LIV have different approaches to running their respective businesses, and integrating these drastically different organizations will require careful planning and execution. In this case, truckloads of Saudi money will likely help ease the transition.
Which brings us back to the M&A lessons that any business can draw from golf’s recent bombshell merger. From business governance and culture to operational strategies and the financials of the transaction, the sheer number of considerations to weigh before committing to a deal are enough to give any CEO pause. But the opportunity to merge, acquire or sell a business in order to grow or earn a lucrative exit are often too good to pass up. So, how is an entrepreneur to know when the time (or terms) are right to sign on the dotted line? Here are four key points to consider before teeing up the merger or sale of your business:
Understand the fundamentals of the transaction—There’s a significant difference between a merger and a takeover. When negotiating deals, business owners must understand the distinction between the two, and know when the conditions are right for a merger rather than a straight sale. Explore the many alternatives before signing the deal—including walking away from the table and ensuring you’re not selling at the wrong time. Work with your leadership team, Chartered Professional Accountant, M&A consultant and other key advisors to develop a strategy that makes sense for your organization.
Conduct due diligence—Work to understand the individuals/organization with whom you’re considering merging, as well as their motivations and strategic objectives. While they may keep your business in operation after the merger, those plans may change. You (the owner) and your key people could be terminated after a brief period (which happens often), with your company rolled into the buyer’s company. It’s also important to ensure that your potential partner fits with your values, culture and management style.
Is the playing field even?—When merging with a much larger or deeper-pocketed entity, there’s a very strong chance that organization will have the upper hand in negotiations, which could be reflected in the financial terms of the deal and leave the selling/merged owner in a poor financial position. Again, that’s where the help of your accounting firm and M&A advisor is vital in negotiating the best possible merger or purchase and sale agreement. Remember: always be prepared to walk away from the table if necessary.
Consider the impact on your key stakeholders—Some employees and customers may not be happy when you merge or sell to a competitor. Some team members may leave, and that could impact your organization’s ability to maintain product/service quality, along with growing the value of the business over time. If you’ve agreed to an ‘earn out’ where compensation is based on future growth of the business, that could pose a major challenge. In addition, consider what steps will be taken to preserve the product or service experience that your clients have come to expect; losing key clients will have an immediate impact on bottom-line performance. Be sure to communicate the reason for the sale, acquisition or merger, what it means for these stakeholders and the future of your business. Being visible and available to answer client or staff questions will help to alleviate their anxiety and convey a sense of stability and continuity if a deal proceeds, or once the transition of the business to new owners is underway.
John P. Seychuk, Partner
For more information about business succession or managing the merger and acquisition process, contact a member of our team today.