By Gary Miller, Founder & CEO, GEM Strategy Management, Inc.
Posted: Monday August 3, 2015 at 12:02am
Many companies are facing slow growth due to a tepid economic recovery, more federal and state regulations, the Affordable Care Act and a lack of confidence in the economy.
Faced with these conditions, small- and middle-market companies are developing acquisition programs as a part of their strategy to accelerate financial growth.
Banks want to lend and have money to invest; interest rates are low; and there is a tsunami of companies for sale. It’s a buyer’s market, and companies are charting a path to the next era of opportunity and wealth.
However, growing significantly in a flat environment requires a bold combination of careful planning, savvy thinking and well-executed tactics.
There are six basic steps to develop a robust but risk-averse acquisition program:
- Plan an acquisition program: Careful planning includes determining acquisition goals, selecting the acquisition strategy and rationale, determining acquisition criteria and matching them against available financial resources. A company must compare its acquisition program to natural/organic growth alternatives to determine if buying other companies is the most effective path to growth objectives. Select an outside management consulting firm with transaction experience to help guide this process.
- Search, find and approach acquisition candidate: Searching for a target comes from leads generated inside and outside the company. Internally, leads often come from boards of directors, employees, sales staffs, suppliers, databases and customers. Externally, they come from accountants, attorneys, investment bankers, management consultants and business intermediaries. Approaching the acquisition candidate might well set the atmosphere throughout the acquisition process. Developing detailed information about the candidate before the approach is made is crucial in developing a narrative that details how the target company fits into the buyer’s plans.
Rarely will you get a second chance to make a first good impression.
- Conduct robust due diligence: Due diligence is critical. It centers on helping the buyer recognize what the buyer is buying, understanding how it fits in an overall growth strategy and developing the post-acquisition plan.
Due diligence requires strategic analysis of the company’s market position, competitive position, customer satisfaction, unanticipated strategic issues, valuation, synergies, cultural fit, technology and scenario analysis.
Acquiring companies must analyze the target’s financial statements, accounting methods, quality of earnings, revenue recognition policies and taxes.
Also, it’s important to assess the target’s contracts, leases, real estate, patents and intellectual property, current or pending litigation, employee agreements, compensation and retention, and other legacy risks.
- Structure the proposal: The first step is to value the company. A third-party valuation company, investment banks and public accounting firms are the best sources. The valuation serves as the basis for the amount the buyer is prepared to pay.
Information gleaned from the process can be used to further refine a proposal. The proposal is intended only to provide a basis for negotiations and will probably undergo numerous changes.
When the offer is presented to the principals of the target company, expect one of three possible outcomes: acceptance without changes, which rarely happens; acceptance with changes; or outright rejection. Regardless, further negotiations will be needed to get to an agreement in principle.
- Prepare transaction documents and close: A number of formalities must be accomplished in order to close the purchase. Acquisition agreements are relatively standard and the emphasis should be on thoroughness, not complexity. About half of the agreement is expressed by “representations and warranties.” The “exhibits” to an acquisition agreement are almost as important to the contract as the representations and warranties.
At this point, attorneys for the buyer and the seller are negotiating and refining the final documents for closing.
- Integrate the acquired company: Integration plans are extremely important and are often the reason an acquisition fails to add value for the buyer.
Blending both companies’ cultures is the most important function of the Integration process. While integrating accounting systems, manufacturing, infrastructure, computer systems, strategic plans, sales territories, distribution systems, contacts and human resources systems are all important, nothing is as important as building a unified culture. Consultants are often used to help in this process.
Following these six steps can add significant value to the enterprise and more rapidly create shareholder wealth than staying with organic growth plans only. Research indicates that companies that complete more deals than companies that do not generate higher returns on investment and deliver stronger financial performance.
Gary Miller is founder and CEO, GEM Strategy Management, Inc. an M&A management consulting firm specializing in middle market privately-held companies. Gary’s team provides advisor services on M&A planning, exit planning, business transfers, preparing companies to raise capital, or owners to sell their companies, due diligence, valuations, and merger integrations. You can reach Gary at 970.390.4441 or firstname.lastname@example.org