15 best practices for M&A and refinancing transactions

Corporate treasurers have a key role to play in facilitating mergers and acquisitions (M&A) and spearheading refinancing activity. But complex financial transactions can be tricky to navigate, regardless of whether the business environment is calm, volatile or anything in between.

Achieving the best possible execution requires strategic planning and detailed preparation, from engaging stakeholders early to ensuring that appropriate hedging strategies are in place. By deploying the following 15 refinancing and M&A best practices, treasurers will be better placed to avoid potential pitfalls, protect their businesses from risks, and prepare for any eventuality.

1. Carry out dry runs

Companies can greatly benefit from conducting a dry run before embarking on a large transaction or M&A deal. Ahead of a major deal, companies can undertake simulations to identify potential issues and refine their strategies accordingly, which can save money and time.

By periodically running through the process, treasurers and their teams can also gain insights into market-clearing pricing and develop well-thought-out templates for future term sheets.

2. Engage the board at the right time

Knowing how and when to engage the board is crucial. Ahead of a major transaction, treasurers should aim to warm up the board with relevant numbers and scenarios that will pave the way for effective decision-making.

This can be as simple as informing the board about available debt capacity that can be accessed without impacting credit ratings – and likewise, how exceeding the stated capacity could impact the company’s credit rating.

3. Review your documentation and strategy

Treasurers need to review their existing documentation to avoid pitfalls and increase their knowledge of the levels of flexibility available. Before entering into commercial negotiations, treasurers should also think through their M&A strategy and assemble the relevant cross-functional teams.

4. Test scenarios to optimize cash flow management

As well as having a clear understanding of inter-month cash flows, treasurers should also aim to test a variety of scenarios, including EBITDA, working capital, capex, dividends, and buybacks. By doing so, treasurers can manage debt and balance sheets more effectively and improve their understanding of how the actual numbers align with projections.

5. Understand the impact of market volatility

When assessing the proposed execution window, it’s important to factor in current market conditions. For example, transactions that take place in the lead-up to a U.S. election or year-end can be affected by market volatility, which in turn may impact credit markets.

6. Gain a clear understanding of the banking support available

Avoiding any surprises regarding banking support is vital. Treasurers should take the time to understand the depth of support available, including their banks’ lending/underwriting capacity. Again, dry runs can help to determine which banks will be able to fulfill the company’s requirements and at what capacity. This helps to ensure a successful refinancing or M&A process.

7. Gauge the available headroom

To gauge headroom, treasurers should take a close look at the maturity profile of their existing debt instruments, including bank debt, commercial paper (CP) and bonds. As a rule of thumb, a flexible and well-spaced structure, such as a mix of term loans and bonds, will provide greater financing stability.

For example, a core M&A structure might include a mix of term loans and bridge facilities that can then be sold down to bonds, floating rate notes (FRNs), revolvers and CP in order to handle the company’s short-term needs.

8. Evaluate credit ratings and liquidity

Treasurers can gain more certainty about a company’s credit profile by conducting credit rating evaluations. Maintaining a balance between debt and liquidity—for example, by having standby revolving credit facilities (RCFs) in place—can also lead to greater flexibility.

9. Understand how business cycles affect working capital

When embarking on complex transactions, it’s essential to understand the cyclicality of the business and what this means for working capital. For example, treasurers should consider whether the loss of staff focus during M&A activity could impact the collections process.

Planning ahead and adopting suitable working capital tools can help avoid stressful situations during the first 90 days following the transaction.

10. Explore the use of off-balance sheet solutions

Treasurers should also explore the extent to which off-balance sheet solutions can be used without negatively impacting the company’s credit rating or reputation with customers. Gaining a clear understanding of the company’s sustainable capacities is a key part of this.

11. Review hedging strategies

It’s vital to spend enough time looking at proposed hedging strategies, particularly if the company operates across multiple countries with varying levels of complexity. Transparency in this process is important as a means of ensuring executive alignment and avoiding any surprises.

Simulations can also be useful when it comes to understanding the availability of hedging lines from banks for larger-scale transactions.

12. Manage interest rate and FX risks

Protecting the company from the impact of interest rate fluctuations and foreign exchange movements is a core responsibility for corporate treasurers. It’s also an activity that needs to be fully aligned with the company’s culture, for example by avoiding any speculation. The treasurer should regularly review existing debt plans with the CFO and know how to unwind these if needed – for instance, if a disposal generates a large cash inflow.

13. Take steps to prepare for a crisis

Preparing for possible future crises, such as a cyberattack, is another important step when preparing for a major transaction. To mitigate the risk of such a crisis, treasurers should ensure that their treasury systems can operate independently.

They should also have appropriate contingency plans in place, such as ensuring that bank systems can be used to make critical payments directly if needed.

14. Optimize smaller deals by integrating debt effectively

Where smaller acquisitions are concerned, treasurers should aim to integrate debt into existing structures in a way that avoids excessive costs. To drive a successful outcome, treasurers should also carry out a meticulous due diligence process and ensure that arrangements with local banks include flexibility regarding prepayment.

15. Be curious, be prepared

Last but not least, being curious and prepared is key when it comes to successful M&A and refinancing activity. By thinking ahead, managing risks effectively, and being ready for any eventuality, treasurers should not only achieve the best possible execution and protect the financial health of the company but also bolster their own long-term careers.