|Posted: 06/22/2014 12:01:00 AM MDT
By Gary Miller GEM Strategy Management
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-adverse 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 corporate 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, data bases and customers. Externally, they come from accountants, attorneys, investment bankers, management consultants and business intermediaries.
Approaching the acquisition candidate may 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 and future directions. Rarely will you get a second chance to make a first good impression.
Conduct robust due diligence: Due diligence is critical to the acquisition process. It centers on helping the buyer recognize what the buyer is buying, understanding how it fits in your overall growth strategy and developing the post-acquisition plan.
Due diligence requires stategic 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 for this function. The valuation serves as the basis for the amount the buyer is prepared to pay.
Information gleaned from the sellers and interests can then be used to further refine a proposal. The proposal is only intended to provide a basis for negotiations and will probably undergo numerous changes. Bring in a strong legal team to structure the legal documents through the remaining acquisition process.
When the offer is presented to senior management and 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 the “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 if not well conceived.
Blending both companies’ cultures is the most important function of the integration process. I cannot emphasize this point enough.
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. Post-integration, 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 of GEM Strategy Management Inc., an M&A management consulting firm focusing on strategic planning, growth capital for expansion, value creation and exit strategies capital formation, exit planning for middle-market companies.
To reach Gary firstname.lastname@example.org or 970.390.4441
More details on each of the six elements of a successful acquisition strategy will appear in the weeks ahead at denverpost.com/business