Having discussed in a previous note the importance of strategic thinking before looking for acquisition targets as well as the necessity of ensuring that acquisition strategy is aligned with plans for organic growth, we take a look now at the actual acquisition process itself and the important things to keep in mind even while the various components of a typical process and the sometimes difficult negotiations are taking place.
Mapping the Acquisition Process
It is important to have a strong sense as the buyer of what needs to happen in terms of due diligence, what value you have in mind for the business, how the new business will integrate into your existing structures and processes and which professional advisors and specialists will you need to help you through the process and facilitate a good result for all concerned.
If you are able to articulate clearly the elements and conditions you want to cover prior to final transaction as well as giving the management of the target business a timetable for completion that is realistic and achievable, this enables a smoother and faster negotiating period as well as freeing up some attention to think about integration from Day 1 of acquiring the new business which, if done in cooperation with management, can further build good working relationships even while negotiations around purchase price, reps and warranties, profit recognition etc. continue. Ultimately, establishing a level of trust with management and allowing them to understand your intentions helps keep all concerned focussed on a positive outcome over purchase price, SPA and other matters required before final completion.
Successful Integration Begins During the Purchase Process
As already mentioned, it is critical that structured thinking regarding integration of a new business take place even ahead of the completion of due diligence. There are a number of examples of processes that have focussed on ticking Due Diligence boxes and the ‘nuts and bolts’ of deals and then have made a substantial mess of a perfectly good business post-deal due to poor integration and a breakdown of relationships.
The process that commences with the granting of a period of exclusivity and ends (hopefully) with a successful acquisition of shares is a great time for management on all sides to get to know each other and in particular to understand the business cultures of the respective companies. This should be done with the aim of securing a smooth transition of ownership and an efficient integration process, to whatever level of integration is required or makes sense. But more than this, engaging in such a discussion can only build the trust that is necessary for a deal to be struck and conducive to good working relationships in the future.
Key Steps to Acquisition Success
While management should expect to find that every deal process is different, alongside building trust and collaboration between the respective sets of management, there are a number of other steps that can be taken to help ensure a successful transaction and a smooth transition. These include the following:
Be Clear about Your Objectives
Again, just as clarity about objectives and what constitutes a ‘good fit’ is vital at the early stage of identifying targets, it remains essential having got to the stage of making an initial offer and embarking on a process aimed at completing the transaction.
Invest Time and Resource to Identify Potential Targets
It may be tempting to presume that the list of targets known to or obvious to management is the final list of relevant companies, but the reality is invariably different. With a defined set of criteria, a comprehensive search of companies in relevant geographies ensures that all possible targets can be identified, analysed and considered giving a greater number of options and avoiding the possibility of ending up in a ‘one shot’ process.
Develop Specific Business Case for each Potential Target
Further developing the strategic rationale in the form of a specific business case is part of understanding the business that is potentially to be acquired as well as forming the core of a well thought through and detailed integration plan. As such, this is best developed, as mentioned above, during the course of the process and with the cooperation of the target’s management, respecting your own prudent judgement of what ought to be disclosed prior to completion of the deal.
Ensure Allocation Resources before Making an Offer
As an SME, unlimited resources, either financial or in terms of management bandwidth, are unlikely to be readily available! Therefore, ensuring before accepting the terms granting exclusivity that there are sufficient resources available to deliver the process successfully is important. Cash for due diligence and advisors is of course necessary but planning to enable your senior management to have enough time to devote to the process is even more essential.
Utilise the Skills and Knowledge of Specialists
Acquisition processes do undoubtedly incur significant costs in the form of deal fees. Nevertheless, legal, tax, financial and commercial advisors, as well as some corporate finance advice, are very often necessary in some form or another. Such professional advice is not cheap but is necessary. Done well and focussed on the key areas to limit time and expenditure, such professional advice can also add significantly to your understanding of a business as well as add value to the development of the business once it has been acquired.
Enter Negotiations with a View to Ultimately Paying a ‘Fair Price’
Everyone likes a bargain, but just as it is bad advice as a seller to try and pull the wool over potential investors eyes, so to it is inadvisable for a potential buyer to be too insistent on paying below fair value. Good management know their businesses and also know their value, more or less. While negotiation to gain a fair purchase price is of course part of the process, driving to hard a bargain can either de-rail the prospect of acquiring an attractive business or can sour relations during the integration and earn-out stages. Indeed, earn-out arrangements for management with shareholdings can be an attractive way to de-risk a deal, ultimately these too need to be presented in an even-handed way for the optimum incentives.
Demonstrate a Sensitivity to the Culture of the Business to be Acquired
A business isn’t just profit and loss nor the products or services it delivers nor the contracts it has secured. While quantitative analysis must be part of an assessment (and due diligence), the culture of a company is often one of the aspects that make a well-positioned and growing business into a proposition that is inherently high value.
As a buyer, this cannot be overlooked and needs to be appreciated and understood in the light of the buyer’s own business culture. Business culture effects many aspects of a business from production, the performance and productivity of its staff all the way through to the perception and retention of its customers. As such, it must be taken into account before, during and when planning for after the transaction completes.
Mergers and acquisitions aren’t just the preserve of large businesses and doesn’t require a discrete team dedicated to M&A with all the head count and financial investment that incurs. For the SME looking to take a significant step forward through acquisition, taking a strategic approach that will inform the whole process from targeting, through the deal process itself and on into the integration period can help ensure the acquisition of value-enhancing businesses that will further accelerate the ambitions of the acquiring company over the long-term. To achieve this, a certain level of planning as well as realism is required.
Next time…”Does Organic and Acquisition Strategy Mix?”