Companies planning their mergers and acquisitions (M&A) strategies must take proactive steps to position themselves for optimum success. With many businesses approaching their financial year-end in February, now is the time to assess market readiness and fine-tune exit strategies. Deal Leaders International (DLI) recently held a discussion on the critical factors that business owners should consider when preparing for an M&A transaction in the coming year.
7 Key Steps to Ensure Market Readiness
According to Taryn Henkel, Executive: Finance Analysis at DLI and Nitish Mudgal, Transaction Executive at DLI, there are 7 essential steps businesses should follow to prepare for a successful M&A transaction:
Clarify Objectives: Clearly define what the business aims to achieve through the transaction. Identify whether the goal is a full exit, partnership or capital injection and how flexible you are with these objectives.
Strengthen Management: Buyers look for businesses with strong leadership beyond the founder, therefore succession planning is key. Ensure you have a capable second-tier management team that can sustain operations post-transaction.
Financial Health Check: Up-to-date, accurate financial records are crucial. Ensure your financial statements are audited and signed, and prepare monthly management accounts to track performance trends,.
Develop Realistic Projections: Create credible financial forecasts that reflect achievable growth trajectories. Buyers prioritise reliable historical data to assess future performance.
Improve Business Efficiencies: Optimise operations to strengthen key performance indicators (KPIs) and drive value ahead of the transaction.
Mitigate Risks: Address factors that could negatively impact valuation, including legal, compliance and operational risks.
Seek Expert Guidance: Partnering with an M&A firm like DLI - professionals who navigate these transactions daily - ensures you maximise your deal potential.
The Importance of Succession Planning
One of the biggest challenges sellers face is ensuring business continuity beyond their leadership. Mudgal highlighted the risks of failing to build a capable second-tier management team: “We’ve seen transactions struggle where companies rely too heavily on a small leadership team without a solid succession plan. Buyers want to see that the business can operate independently of the founders.”
Companies must start grooming future leaders well in advance to ensure a smooth transition. “If you wait until you’re ready to sell, it’s already too late to develop a reliable management structure,” Mudgal cautioned.
Financial Due Diligence: A Make-or-Break Factor
Financial transparency is paramount in any M&A deal. Henkel outlined the critical documents that potential buyers will examine:
Audited financial statements for the past three to five years
Monthly management accounts to identify revenue trends
Budgets versus actual performance to assess forecasting accuracy
Consolidated financials for group structures
Revenue and gross profit breakdowns by product and customer
“Many deals fall through during due diligence due to incomplete or unreliable financial records,” Henkel warned. “Ensuring that financial data ties back to operational reporting is essential for building buyer confidence.”
Mudgal added, “The failure to reconcile financial reports can cause significant delays and additional scrutiny during due diligence. Investors need to see that revenue numbers are accurate and tied to key customers and product categories.”
Working Capital and Cash Flow Considerations
Maintaining a balanced working capital structure is another crucial aspect of deal preparation. “Sellers need to understand how their debtors, creditors and inventory levels impact valuation,” Mudgal explained. “Excess cash in the business may be seen as necessary for operations unless it has been structured appropriately.”
Henkel added, “Acquirers will evaluate normalised working capital levels over a 12 to 24-month period to determine the sustainable cash flow requirements of the business. Any excessive cash should be distributed before the sale to avoid undervaluation.”
Furthermore, sellers must align their revenue and cost cycles. “Ensuring that revenue and costs are properly matched in the same financial year is crucial,” Henkel stated. “We’ve seen cases where project revenue was received after year-end while costs were accounted for earlier, creating a distorted financial picture.”
Being Due Diligence Ready
Global trends indicate that due diligence processes are becoming increasingly rigorous, with extended timelines driven by factors such as ESG compliance, IFRS complexities, and regulatory considerations. “Buyers expect well-prepared sellers who can provide clear, reliable data from the start,” Mudgal stated.
Virtual data rooms are becoming essential tools in the M&A process. “Technology plays a key role in streamlining due diligence, ensuring secure document sharing, and minimising delays,” Henkel noted.
Henkel also highlighted the importance of tax planning. “While formal tax structuring before going to market isn’t always necessary, understanding the implications of a share sale versus a business sale is key. Acquirers often have their own preferred structures, and pre-emptive restructuring may lead to unnecessary complications,” she explained.
Final Thoughts
M&A success in 2025 will hinge on early preparation, financial transparency and strategic planning. By following these key steps, business owners can maximise value and ensure a seamless transaction process. As Mudgal advised, “The best time to start preparing for an exit is well before you intend to sell. The earlier you engage with experts, the smoother the process will be.”
For business owners considering an M&A transaction, engaging with an experienced advisor like DLI can make all the difference in navigating the complexities of the deal landscape. If you are planning a future exit, now is the time to start your journey.