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mergers and acquisitions guide

The Buyer’s Perspective: Mergers and Acquisitions in South Africa

Shifting the focus to the buyer’s point of view, this guide will offer insights into mergers and acquisitions in South Africa, focusing on what a buyer needs to know. The process a buyer takes is different to a seller, so familiarising yourself with the nuances of this viewpoint will increase your chances of closing a successful deal.

What Does Buy-side Mean?

The South African merger and acquisition environment is a complex landscape, and both sellers and buyers should conduct ample research on M&A before considering the transaction.

With a broad host of complexities, procedures and legalities that need to be followed, many potential buyers in the market simply brush off their desires to participate in this market.

However, there are various support systems and detailed sources of information that can greatly assist buyers interested in these types of strategies.

Every product and service that exists today has a supply and demand factor. This is especially true for mergers and acquisitions. The supply factor can be seen as the seller’s perspective, whilst the demand factor can be seen as the buyer’s perspective.

Therefore, when we talk about the ‘buy-side’ of mergers and acquisitions, we are talking about those individuals and consumers that want to actively participate in the mergers and acquisition market by engaging with and purchasing different products and services.

While buying a traditional business and pursuing M&A deals have considerable differences, it may be helpful to retrace your steps on some foundations when buying a business.

If you are confident with these foundations, there are complex considerations and tasks that need to be pursued by M&A buyers, especially within South Africa. This process, which may ultimately determine whether a purchase is successful and satisfactory or not, will be explained further below.

Find out more: Looking to acquire high-value businesses? Explore MergerVault.

Defining Your Criteria

M&A criteria are the different characteristics, requirements, and traits of a deal that a buyer develops to identify different potential M&A opportunities.

It is important to note that even though there are recommended M&A criteria for buyers, each buyer will naturally have unique criteria based on their personal needs and wants. Simply put, M&A criteria assist a buyer in choosing a compatible opportunity.

An opportunity may be compatible with a buyer based on the buyer’s risk-level, personality type, interests, values and beliefs, objectives, and/or industry knowledge.

Additional criteria which a buyer may choose include but are not limited to:

  • Size
  • Profitability
  • Location
  • Potential growth
  • Synergy
  • Price
  • Micro and Macro risks
  • Organizational culture

Identifying Your Target List

basis of acquisition

A target list is comprised of target firms. A target firm is a company that has been identified by a buyer as a potential and attractive M&A option.

These opportunities are often referred to as high value since they meet most or all a buyer’s criteria. Since high value firms often yield above-market returns and successes, these firms will usually be on the target list of many different buyers. It is therefore vital that buyers frequently update their target list so that they stay up to date with the latest market activities.

When deciding on which businesses to add to their target list, many buyers take into consideration three important factors of a business: turnover, revenue, and profitability. There are multiple opportunities for high value targets in different industries that have strong figures relating to these factors.

Contacting the Target

Once a buyer has developed a target list with a reasonable amount of target firms recorded, it is now time to start making initial contact with each of these firms.

One of the major mistakes that many buyers make is that they make initial contact with the incorrect business representative, or they contact a business via an inefficient channel.

For example, it would usually be unprofessional and detrimental to contact a general employee of a business. Rather, one should aim to contact a business representative who has decision making power, such as a CEO.

Furthermore, it would be unprofessional to contact a firm via the general email address of the business. Rather, contact should be made through the personal email address of the business CEO, or the advisor that is representing the buyer.

Find out more: Need an accurate, trustworthy valuation of a business? Try our free, online valuation tool.

Preliminary Valuations

One of the primary reasons why it is important for a buyer to conduct a preliminary valuation of a business is to ensure that the price offered is fair and realistic.

There are various factors that both a buyer and seller take into consideration when determining and assessing the price to merge or acquire a business. Some of the more frequent factors that are considered include:

  • Financial leverage
  • Succession plan
  • Expected future performance
  • Cashflows
  • Asset types

Additionally, there are also various techniques and methods used value a business. These include:

  • The asset approach
  • Seller’s discretionary earnings
  • Price to earnings ratio
  • Entry cost assessment
  • Discounted cash flow
  • Comparable analysis

The valuation techniques mentioned above, as well as other questions surrounding the valuation of business in South Africa, are explained in more depth in this guide. Likewise, you can generate a pragmatic valuation using’s valuation tool.

In the case of established and popular businesses, goodwill is often included in the valuation figure.

Goodwill is an intangible asset which is owned by a business. Businesses with valuable intangible assets, such as their brand name, established customer base, market reputation, or high employee engagement, usually increase the valuation figure of their business.

This is because even though it is difficult to valuate an intangible asset, certain intangible assets can be extremely desirable and may ultimately lead to the success of a business.

For example, Steers has a very strong brand name and market reputation in the South African fast-food industry. Therefore, when assessing the value of Steers, the factor of goodwill may greatly increase the financial value of the fast-food chain.

Starting the Negotiations

When conducting negotiations, it is important to note and follow the customary business etiquette and generally accepted negotiation practices that exists in South Africa.

By adhering to these customs and traditions in the business world, it may lead to a more smooth, professional, and successful deal.

As a buyer, there a multiple different negotiation tactics that can boost your chances of closing a deal based on terms and conditions which are favourable to you.

Perhaps one of the simplest yet effective techniques is preparation and conducting research. Preparing all your necessary documents, preparing for different potential scenarios, and practicing different negotiation skills are all great ways to not only impress the seller, but also increase the likelihood of closing a deal.

Conducting research on the business and the factors surrounding the business you would like to acquire or merge with is vital. Researching the industry, previous public offers made to the business, specific details about the business such as yearly revenue, and future plans are all researchable information that may assist with the negotiation phase.

Due Diligence is Crucial for a Buyer

Due diligence is the process in which a buyer verifies that the information supplied by the seller is correct and factual. This process is usually conducted before entering into a binding contract with a seller. There are three main areas that need to be assessed during the due diligence process: accounting, legal, and the market environment.

The target firm’s accounting statements and books should be analysed by a professional. The aim of this analysis will be to ensure that all the numbers in terms of the business’s revenue, profit, taxes, liabilities, assets, and other important business elements that can be quantified are all correct, and that there is nothing dubious happening.

An assessment and analysis of the target firm’s legalities need to take place. This will include assessing whether the firm has any current legal threats they face, or if the firm has any potential future legal threats, such as pending litigation.

Lastly, commercial due diligence needs to take place. This is an important step in the due diligence process as it allows the buyer to assess whether the target firm’s business model is sustainable within its market environment, and that the current successes they are facing will continue to be seen in the future.

Securing Finances as a Buyer

kicking off the negotiations

Viable and sustainable businesses in South Africa can sell for millions, if not billions of Rands. Securing finances to aid in the purchasing of a business is common practice, and in today’s business environment both in South Africa and worldwide, there are many different options of how a buyer can secure financing.

A source of finance is private investors as well as venture capitalists. These sources of funds often offer lenders a much more competitive borrower’s rate compared to the more traditional sources of funds, such as banks.

Private investors and venture capitalists also offer further services which traditional financiers do not usually offer, such as providing advice and consulting on various business matters and a shared workspace. Examples of venture capitalists in South Africa include Long4Life and Rising Tide Africa.

Closing the Deal

The closing of a deal refers to the mutual agreement between the buyer and seller of a target firm. The terms and conditions that were negotiated in the previous stage are agreed on, and a contract is drawn up and signed by both parties.

Once both parties have signed the contract, the M&A deal becomes legally binding, and both parties will have certain duties and responsibilities that they will need to carry out.

In the case of a buyer acquiring a business, the process of transferring the ownership of the business to the new owner will commence. In the case of merging two businesses, then management of both businesses will work together to merge efficiently and seamlessly.

Due to the technical nature of the M&A process, such as ensuring that all parties meet the legal requirements established in South Africa, closing a deal may take several months.

However, once the closing of a deal is finalised, many M&A deals go on to be successful and ground-breaking firms. Examples of successful South African M&A deals include British American Tobacco acquiring Twisp, DPO acquiring PayFast, Bain Capital acquiring Edcon Limited, and the merging of Santam and Guardian National Insurance.

Find out more: Want to know more about the sell-side of M&A? Read the seller's perspective in mergers and acquisitions.

Concluding Thoughts

The M&A market in South Africa is a steadily growing and continuously exciting environment. Although a considerable number of activities, processes, and requirements need to be undertaken, South Africa has a vast selection of firms in different industries available for interested buyers.

Whilst working through the above steps of the M&A process, it is vital that all parties and stakeholders involved in the deal continuously work with each other to ensure the best deal is reached for all parties. Through collaboration and consistency, M&A deals in South Africa have a very bright future.

For more information on M&A, or further support in your purchasing journey, feel free to contact us.

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