Companies acquire for a broad variety of reasons.
Some acquire to:
- Increase market share
- Create economies of scale
- Offer new services
- Generate new sources of revenue and profits
- Acquire management
- Bring in fresh ideas
- Enter new markets
When you look at building or buying, the fastest and often easiest path is by buying, provided you have access to capital at reasonable costs and the ability to effectively integrate the acquired business.
The challenge in making acquisitions work is managing each step of the process carefully. This often works best when clear-cut goals are thought out and presented to your current employees, many of whom will perceive these decisions as affecting their future opportunities. It is worth taking the time to get key employees to buy into the larger future you are creating. Clearly defined objectives can also serve as a guideline at several stages of the process.
There are a number of areas you need to review prior to seeking acquisition targets. The answers to the following questions can save your firm valuable time and resources.
These core issues can serve as a template for your acquisition opportunities.
1. What are your goals in acquiring?
- Expand in existing markets
- Open new markets
- Increase market share
- Spread infrastructure costs
- Reduce or eliminate competition in a particular market
2. What are your acquisition criteria?
- What is the annual sales range of your targets?
- What are the financial performance goals you seek (e.g. Gross Margin / EBIT / average bill rates / sales history growth rates, etc.)?
- What geographical markets do you want?
- What sector(s) of the industry are you looking for?
3. How will your acquisitions be funded?
- Internally
- Borrowed, if so, are funds approved and in place
- Private Equity / Venture Capital
Are you looking for top-shelf well run companies or distressed properties? What resources are you better equipped to offer, financial, operational or human? This may influence the type of business you can integrate most successfully.
4. In choosing an acquisition target buyers often look to create value for themselves by:
- Lowering unit costs through economies of scale and better cost management
- Increasing market power by spreading its' brand over a wider base
- Entering new geographic or industry markets
- Offering existing customers additional services
- Creating synergies so 2+2 equals at least 5
- Gaining new technology
- Expanding their customer base
- Acquiring management talent
5. What do you need to see in a target opportunity?
All of these factors listed below would be nice to have, but it's important to prioritize as companies like people are rarely perfect:
- Strategic fit
- Compatible culture
- Talented management
- Sustainable growth
- High Gross and Operating Margins
- Operating focus, single or blended
6. How will you identify target firms to acquire?
- Use industry directories to develop a target list
- Call or write to this target contact list
- Ask your Staff to identify their best independent local competitors
- Contact respected industry M & A Advisors & Intermediaries
- Engage an intermediary to bring you suitable targets
7. What will you buy: assets, stock, either?
What are the income / capital gains tax issues for you as they relate to each of these acquisition structures?
8. What deal structure best suits your needs?
- % of cash on closing?
- Will you use notes? What interest rate will you offer?
- Earn outs? If so, for how long? How will you structure upsides and downsides?
- Will you use Stock?
9. Who will be on your acquisition assessment team?
- Which internal staff members
- Outside experts /advisors-Legal, Financial & Business
10. Who will negotiate your transactions? Are they aware of?
- Current deal pricing?
- Various deal structures?
- Tax consequences for buyer and seller?
- How best to negotiate with a future employee of your firm?
- How to work with the seller's professional advisors?
For smooth sailing during the transaction these are areas that should be thought through in advance. Many deals are lost due to inflexibility on one or both sides of a transaction.
You rarely will get a seller to agree to everything you want (if they did, you'd be suspicious). So decide what you really need and pick your fights around vital issues with high value for you.
11. What will you require for Due Diligence?
You're Financial/Legal and if you choose a Business advisor should be able to assist you in developing an appropriate list of items to examine and review. Some items would include:
- A complete set of financial statements for last 3 years
- Tax returns covering the same period
- Most recent month's Balance Sheet
- Property Leases
- Equipment Leases
- Staff personnel records-Organization chart
- Description of all Employee Benefit plans
- Detailed Accounts Receivables Listing-Bad Debt History
- Schedules of furniture, office equipment, computer hardware/software, telephones
- Budgets for current and future years
- A variety of schedules detailing assignments/projects with clients
- Reports from outside Accountants/Auditors
12. What is your timetable?
13. How will you integrate the acquired businesses?
- Fully with your brand name
- Partially as a (your brand) company, i.e. ABC a Mega firm Company
- Autonomously as an entity appearing to be independent
14. Do you have an Integration Plan?
If you have a plan, look for seams and tighten it up.
Integration is usually the most critical area for a successful acquisition. Blending cultures is often the key to a successful transition. It will be addressed in a future Newsletter.
Have a wonderful, Healthy and Fun Holiday Season and A Prosperous New Year!
