On Growth

The 3 Critical Components for Microsoft Partner M&A Nirvana

Heed these tips to avoid spending time and money only to have your transaction go sideways in the 11th hour.

• By Mike Harvath
• May 31, 2018

Fundamentally, there are three pieces that need to be in place in order for any Microsoft partner business or technology firm to have a stellar merger and acquisition (M&A) result.

You need the right team, the right formula and the right financial process.

The Right Team
The first thing you want to do when considering selling or buying is to partner with an M&A adviser. The last thing you want to do is work with some broker or attorney who's simply involved from a pure transaction perspective.

You should consider working with an M&A adviser who has a proven process, plus experience, to get you the result you need in order to be successful. You need to have someone who's got your back.

The best M&A advisers will guide you along the process as you work through the tactical tasks, so that your company is charting the right course. They should be helping you through the process of due diligence, creating a healthy balance sheet and helping you figure out how much you can afford to buy, or how much you should expect in a selling transaction.

Next, there's the dreaded tax adviser. But, before you throw stones at the finance people, understand the role. It's only to save you money. Pretty simple. The advice you receive should help your overall finances become the most efficient, so the entire transaction benefits you.

Lastly, there's the legal part of the process. The lawyers involved should only be focused on thing: mitigating risk. Often time, attorneys will want to work outside their lanes, but the best ones are purely centered on making sure you don't take too big of a risk.

The Right Formula
The best formula is an exercise called specialization, verticalization and productization. Here's what it looks like:

• Specializing means you would pick one area of the Microsoft stack/cloud offering where you are an expert.
  
  
• Verticalization means you sell your services into a specific industry where you have expertise, rather than selling horizontally to everyone.
  
  
• Productization means you package your services to make it easy for your buyer to buy and for your sales team to sell. The goal with productizing is clarity. If your prospect doesn't know what they're buying because they're confused, then they won't buy.

The Right Financial Process
As we've talked about before -- but can't stress enough -- there are two ways to structure your M&A.

The result of your M&A transaction should be either an asset sale or a stock sale.

Here's the difference:

1. A stock sale is the purchase of the owner's shares of a company, whereas an asset sale is the purchase of individual assets and liabilities.
   
   
2. In an asset sale, the seller retains possession of legal entities and the buyer purchases individual assets of the company, like property, equipment, licenses, goodwill, intellectual property, trademarks, patents and inventory.

For the buyer, if that's you, an asset sale allows you to "step up" the business' depreciable basis in its assets. For the seller, an asset sales typically generates higher taxes because the assets are taxed at capital gains rates.

To wrap up the financial part of the M&A conversation, whether you're looking at being acquired or buying another professional services firm, your tax considerations should be assessed carefully. It's critical to determine potential tax risks that might require attention.

As part of the financial process and tax due diligence, the first step is to optimize your cash-flow needs to reflect your net cash flows. Second, the focus should be on saving you money by being as financially efficient as possible. Third, there has to be an analysis of tax issues relevant to you (the seller) and the buyer, especially in assessing the post-merger cash flows.

M&A is getting more and more complicated. The last thing you want is to spend time and money only to have your transaction go sideways in the 11th hour. Once you have the right team, the right formula and the right financial process in place, you're well on your way to a successful result in either selling your firm or acquiring another.