For small and medium-sized enterprise (SME) owners growth opportunities often come from mergers or acquisitions (M&A). Whether you’re looking to buy a competitor, merge with a complementary business, or sell your own company, the process can deliver exciting expansion, but it also presents legal, financial and operational challenges. With careful planning and the right legal guidance, you can navigate these successfully and unlock long-term value for your business.
This article outlines key considerations for SMEs contemplating M&A activity.
- Clarify Your Strategic Objectives
Before you begin exploring potential deals, first define why you want to merge or acquire:
- Growth acceleration: Enter new markets, acquire customers, or scale quickly.
- Diversification: Add new products or services to reduce dependency on one revenue stream.
- Synergies: Realise cost savings through consolidating back-office functions or gaining operational efficiencies.
- Exit planning: For retiring owners, M&A may be a pathway to liquidity and succession.
Clear objectives help shape your target criteria and negotiating position. Without strategic alignment, even financially attractive deals can fail to deliver value.
- Conduct Thorough Due Diligence
Once you identify a target business, conducting due diligence is vital. This process involves examining the target’s legal, financial and operational health. Key focus areas include:
- Financial performance: Review historical accounts, tax returns, projections and debts.
- Contracts and liabilities: Assess employment agreements, supplier contracts, leases, warranties and indemnities.
- Intellectual property: Confirm ownership of trademarks, patents and domain names.
- Regulatory compliance: Check licences, permits and compliance with industry-specific laws.
- Litigation risks: Identify existing or threatened legal disputes.
Due diligence isn’t just about spotting problems, it’s about understanding the risks you’ll take on and ensuring the price reflects those risks. Engaging legal and financial advisors experienced in M&A can uncover issues that might otherwise be overlooked.
- Understand Legal Structures and Implications
The legal structure of the transaction significantly impacts tax, liability, and operational control.
- Share purchase: You buy the target business by purchasing its shares. You inherit both assets and liabilities.
- Asset purchase: You select specific assets and liabilities to acquire. This can offer more control and reduce unwanted liabilities.
Each approach has legal and tax implications. For example, asset deals allow you to avoid certain liabilities, but may complicate transfer of leases or licences, which often require third-party consent. A share sale may be simpler operationally, but you accept all legal risks attached to the business.
Your legal advisor can help determine the most effective structure based on your objectives.
- Comply With Competition and Consumer Law
In Australia, mergers and acquisitions may attract scrutiny under competition law if they significantly lessen competition in a market. The Australian Competition and Consumer Commission (ACCC) reviews transactions that meet certain thresholds, particularly where larger enterprises are involved or where the merger affects a concentrated industry.
Even for SMEs, it’s important to assess whether your proposed transaction could result in market domination or harm consumers. Early engagement with competition law specialists can help identify and address these issues proactively.
- Consider Tax and Stamp Duty
M&A transactions may trigger tax and duty obligations. In Western Australia, duty can apply on the transfer of dutiable property, and the amount depends on the transaction type and consideration paid.
- Stamp duty: Typically applies to the transfer of assets like land and business assets.
- GST implications: Goods and services tax consequences can vary depending on whether the sale is an asset sale or a share sale.
Careful structuring, often in consultation with tax advisers, can reduce unexpected costs and improve post-deal cash flow.
- Plan for Integration Early
M&A isn’t just a legal and financial event, it’s a people and process event. Many deals fail not because of price or terms, but because of poor integration planning.
- Cultural alignment: Assess organisational culture and plan for onboarding new teams.
- Systems and processes: Decide how accounting, HR, IT and customer systems will be unified.
- Communication: Prepare clear messaging for employees, suppliers and customers.
Integration planning should start long before settlement and involve leaders from across both businesses.
- Negotiate and Document Comprehensive Agreements
Once due diligence and valuation are complete, the next step is negotiation and documentation:
- Heads of Agreement / Letter of Intent: Sets out key terms before formal contracts.
- Share or Asset Sale Agreement: The legally binding contract outlining price, representations, warranties, and conditions precedent.
- Disclosure Schedules: Detailed lists of exceptions to warranties given in the sale agreement.
Negotiation isn’t just about price, it’s about risk allocation. Sellers typically resist providing unlimited warranties, while buyers want reassurance about the accuracy of information. Escrow arrangements, indemnities and earn-outs are common mechanisms to bridge gaps.
Your solicitor will ensure that documents protect your interests while facilitating a smooth deal.
- Engage Specialist Advisors
M&A is complex. Engaging a team of specialists early, including legal, accounting, tax and industry experts, can make the difference between a successful transaction and a costly mistake.
- Lawyers guide structure, contracts and regulatory compliance.
- Accountants verify financials and advise on tax outcomes.
- Valuers provide objective valuations.
- Industry consultants help assess strategic fit.
Professional fees are an investment in risk mitigation and deal quality.
Final Thoughts
Merging with or acquiring another business can offer significant opportunities for growth, diversification and competitive advantage. However, success depends on careful planning, thorough due diligence, legal compliance and seamless integration.
For SME owners, proactive legal and commercial advice ensures that your M&A journey delivers the outcomes you envision with risks managed and value unlocked.
About the Author: This article has been authored by Steven Brown. Steven Brown’s legal career covers working with multinational corporations and Australian listed companies to family-owned businesses. This range of experience has equipped Steven with the unique ability to offer tailored legal services that make a significant difference to businesses of all sizes.
