There are many misconceptions about international mergers, acquisitions, and divestitures.

The five biggest myths are:

That cross border transactions are not worth the effort.

Cross border transactions can be very productive and profitable whether you’re on the buy or sell side – depending on the opportunity. Many companies like to expand into new markets and do well; for example, Illinois Tool Works, the multi-billion dollar US company has made over 30 acquisitions in Brazil alone. Obviously, they have the vision and resources to complete these deals and would have stopped long ago if they were unprofitable.

That foreign buyers always pay more when acquiring a company.

Foreign buyers sometimes pay more for an acquisition in a different country to buy their way into a market. But, that’s not always the case. Many foreign buyers are careful buyers and only pay for value.

That a cross border transactions will take an impossibly long time.

Cross border transactions can take extra time as sometimes due diligence will be slowed down by the need to translate documents, to obtain the necessary approvals, understand local customs, etc. However, for an organized buyer these extra steps only add a modest amount of time, not the unreasonably long time that many envision.

That foreign buyers or sellers are impossible to work with.

Many people believe that foreign buyers or sellers are difficult to work with. There is absolutely no truth to that. People are people and that’s the same around the world. The percentage of people that are difficult to work with is probably the same in every country. That’s a simple fact of life. And, many foreigners doing international mergers and acquisitions are actually a pleasure to work with.

That foreign sellers always try to cheat the buyers.

Foreign sellers, despite some beliefs to the contrary, are not out to cheat the buyers of their companies. Many countries use different accounting conventions, which do not mean the accounting data has been “cooked.” Frequently, buyers think that whatever is happening in the transaction is directed towards them. Most of the time, it’s just that the buyer doesn’t understand the local customs.

As with any transaction, foreign or domestic, the key to success is thorough due diligence.

Acquiring a software company is much like acquiring any company in that thorough due diligence needs to be conducted. That being said, there are five factors that are critical when examining a software company for acquisition.

M&A Software Transaction: 5 Questions to Ask

(1) Can the seller prove ownership of the source code? It’s important for the buyer to know that the source code is owned or was created by the seller.

(2) Will the software programmers that created the code stay with the company post acquisition? This is important, particularly with complex software programs as it’s difficult for outsiders to understand the architecture and features.

(3) Many times, sellers will offer their key employees, especially software programmers stay bonuses that match whatever time period the buyer is requesting. While that’s fine, many buyers have been quite surprised that after the magical time period that a majority of the employees leave. Therefore, it’s important for the buyer to know that any employee that has been offered a stay bonus may quit as soon as the time period is fulfilled. Such key employees may need additional incentives to stay beyond that bonus period. The best way to cover this is via a rep and warranty in the Definitive Agreement that reveals if stay bonuses are being paid and to whom.

(4) In any business, customers are critical as they provide the cash flow. The important question is how committed are they to the business being sold. If the customers are running important software programs and are worried that the new buyer won’t support them adequately, there might be a huge risk of them switching to another vendor.

(5) Another important point is to make sure that software license sales prior to closing don’t contain future obligations of updates or to maintain such software. That could be a very expensive obligation for a buyer.

If you’re considering hiring a middle market investment bank to either buy or sell a business, it’s important to check the firm out carefully. Successful transactions don’t just happen. To obtain the best result, transactions have to be managed carefully by seasoned professionals.

Middle market investment banks should have both domestic and international reach. That’s important for both buy and sell side transactions in M&A. On the buy side, one shouldn’t miss the chance to view every possible target in the defined geography. On the sell side, it’s important that the seller not miss another possible buyer, who might have offered better terms and more consideration, just because they’re outside of the territory that is most familiar to a particular firm. In other words, one should hire a firm that can truly cover the world. There are always opportunities if one knows how to find them.

It’s also important for middle market investment banks to have the ability to create excellent documentation. Those documents will be the first thing that the potential target or buyer will see about your company. As they say, “first impression counts!” If you take a moment to examine the documents that the prospective investment bank sent you, it’s a giant clue as to how they present their clients.

Another important element to check is the firm’s ability to structure and negotiate difficult transactions. The best way to ferret out this information is to ask about a complex transaction. Another way is to look at the firm’s “tombstones.” Are they all transactions between well-known buyers and sellers or are some of them cross-border and between companies that aren’t so obvious?

Staffing on any advisory engagement is important. How long have the principals of the firm been employed by that particular middle market investment bank? What is their experience level? What are the chances that they will leave the firm mid-transaction? There have been many cases of clients being impressed with the individual handling their project, only to find that they took a better position across town. And, understandably, the transaction stays with the firm, not the individual. As we say, buyer beware.

To summarize, check out your middle market investment bank's experience level, years in business, credentials of the staff and ability to present well.

A little due diligence goes a long way to insuring a successful transaction.

As you will see from the chart below, worldwide, middle market M&A activity has been steady for the last three years despite numerous worldwide economic ups and downs.

Given the improving economic climate and the strong fundamentals supporting M&A, we believe that M&A transactions will increase in 2014.

When hiring a boutique investment bank, it’s important to focus on three main areas:

How long has the firm been in business?

Often times, many boutique investment banks are in existence because the founder or founders are between positions at larger firms. Therefore, if the firm you are considering has been in business for less than five years, it begs the important question: Is this a part-time occupation or a serious business? Most sellers only have one company to sell, so it’s important that the advisor be serious and not in between lucrative positions. If the firm that you are considering has been in business for more than 10 or 20 years, you’re probably safe.

Who will work on the proposed transaction?

The staffing for the engagement is important. How much M&A experience do they have? How long have they been with the firm? Are they likely to leave the firm in the middle of your transaction? Experience is important as M&A transactions are never mundane. There are always twists and turns from all of the parties involved. A successful M&A transaction occurs when a series of challenges are solved fast enough to keep both buyer and seller engaged.

What are the capabilities of the boutique investment bank?

What types of deals has the firm completed to date? Do they have international capabilities, not necessarily international offices? In other words, have they completed cross-border transactions? Many firms claim to have that capability, but it’s limited to completing transactions to or from their home country. True cross border capabilities include the ability to complete transactions completely outside the firm’s home country. International capabilities are more important now than ever before. The world has gotten smaller and it’s expensive to miss opportunities just because they’re outside of your geography.

photo credit: kenteegardin