Due diligence is essential to making a good deal

The deals promise to keep rolling in 2020 — especially in the first half — following a strong 2019 for M&A activity. It’s estimated that last year saw more than $1.5 trillion in domestic and cross-border deal volume. 

The health of the U.S. dealmaking climate in 2019 stemmed from easy financing conditions, low interest rates, the impact of earlier tax cuts and the relative strength of the economy. Consequently, many businesses could borrow cash fairly cheaply in order to make an acquisition or stockpile cash to invest. Additionally, many private equity firms have billions in undeployed capital that’s entering the market, which means that we’ll likely see lots of M&A activity in 2020. 

It may not all be smooth sailing, however, as many anticipate a potential economic downturn by the end of 2020. This could result in capital drying up as lenders modify their risk tolerance. Additionally, the upcoming presidential election will result in uncertainty, which could lead to a slowdown in dealmaking.

So how can business owners looking to buy or sell successfully navigate the dealmaking climate in 2020?

Companies, particularly young and highly innovative startups, have benefited from higher valuations, which come with competitive bids from buyers and shorter due diligence periods. Buyers who can offer a good price and a quicker timeline typically have a competitive advantage. However, in 2019, the story of WeWork, originally valued at close to $50 billion at the start of the year before plummeting by 80 percent nine months later, will act as a cautionary tale. Business owners may think twice before looking to shorten due diligence timeframes at the expense of thorough valuation assessments. It could even raise questions over whether to acquire at all.

In a competitive market, companies also have to ensure that a deal takes them closer to their objectives — and not just jump on a deal because it’s there. For our company, any acquisition should support one or more of the following growth strategies: Expand our product line to meet changing customer demands or expectations, facilitate geographical expansion in a region that we’re looking to enter or where we want to increase the scale of our presence, or service an adjacent or related market that’s underinvested in or underserviced by other providers. 

Make sure that a target acquisition makes sense from a strategic perspective. Companies have to ensure that acquired businesses advance corporate objectives, integrate with their existing operations and provide a good cultural fit. Many business owners assume incorrectly that they can quickly and easily integrate an acquired company into their own. The reality is that it can take years before a company is fully integrated. Similarly, the acquired company also has to be ready to meld and integrate with the buyer, doing its own diligence to ensure it has found the right suitor.

Bottom line: Investing in the right acquisition, rather than just spending for the sake of making an investment — any investment — will be critical to surviving and even thriving when economic conditions do finally change.

John Ensign is president and chief legal officer at MRI Software.