It’s natural for company owners to explore ways to move their businesses forward. In this post, we’ll describe best practices for each phase of mergers and acquisitions. In many cases, growth means acquiring another company or merging with a similar organization to gain a competitive advantage in the marketplace. However, the process isn’t always easy, and numerous decisions must be made before a merger or acquisition can be completed.
To avoid making errors, it’s crucial to know and understand how to complete the process seamlessly. Business acquisition experts know there are specific steps to follow to avoid problems during any merger or acquisition. Here are just a few of the best practices to adhere to when it’s time to move your company forward.
Create a Strategy
It’s virtually impossible to move forward without first defining what you’re attempting to accomplish and what steps you’re willing to take to achieve those objectives. During this phase, working with a business broker will make it easier to set both short- and long-term goals and define the strategies necessary to reach those goals.
Develop a List of Targets
Once you’ve established your goals and clarified the requisite strategies, the next step is to establish a list of target companies to consider. In some instances, those targets may be on the market, but that’s not always the case. Brokers providing mergers and acquisitions services may also be aware of potential targets that are not currently on the market.
Your business broker will work with you to develop a list of candidate businesses that would be beneficial acquisitions. Depending on your goals, that might mean companies which enhance your strength in a specific niche or allow your organization to expand into other market segments. This might mean buying a business in your supply chain, also known as vertical integration.
Evaluate Potential Targets
Once the basic list is established, best practices require further analysis to determine which targets should be more carefully considered and which ones are less likely to provide the required benefits. In other words, not every potential target will be what it appears to be on the surface.
Some companies will be far too disorganized to make them attractive. Others may not be investing enough in research and development, depending instead on products that are currently successful but may not be in the near future. There are also times when a potential target doesn’t have a culture or customer base that would blend with your objectives.
Contact the Targets
Next, it’s time to contact the targets. When the target is already being marketed, that process is rather simple, and your business broker will certainly handle the initial contacts. In situations where the targeted company isn’t for sale, approaching the owner will require a little more finesse.
Based on the individual situation, the initial contact might be made by the business broker, but there are times when other options might be considered. To obtain the desired results, planning the approach may take time, so don’t be in a hurry. Follow the advice of your business broker and other trusted advisors.
Begin the Valuation Process
At this stage of the process, it’s time to get down to evaluating the nuts and bolts of target company. All companies know they’ll need to provide financial reports to prospective purchasers, but not all companies will be totally upfront with their disclosures. That’s not to say they will falsify documents, but they may choose to obfuscate some less-than-ideal aspects of their financial situation. Let the experts evaluate the financial reports and determine if requesting additional information is warranted.
Having the financial reports and tax returns are important, but it’s also important to identify what assets are being purchased and what those assets are worth. To establish that, various inspectors and appraisers may be used to establish their value.
Make an Offer
After the value of each asset is better established, it’s time to develop an offer, otherwise known as a Letter of Intent or LOI. Again, the business broker will work with you to write an LOI (offer) that defines the selling price and terms. As a best practice, it’s important to have your attorney and accountant review the offer before it’s presented to minimize the potential for errors.
It’s rare for an initial offer to be accepted. The Seller will likely present a counteroffer that you’ll need to consider. Remember, negotiation is an art, which means it’s once again time to look to your business broker and other advisors for advice. They can make it easier to determine if the counteroffer is workable or if additional changes will be necessary.
Conduct the Appropriate Due Diligence
Once a basic agreement is reached, it’s time to make sure all assets and clauses included in the agreement are carefully examined. All legal matters should be reviewed by an M&A attorney to make sure there are no surprises later.
Everything you or your representatives evaluated earlier will be reviewed again to uncover hidden issues or potential problems that could create any type of issue later. For example, errors in past tax returns could, and likely would, cause problems for the purchaser or bank. Performing due diligence takes a lot of time and attention to detail, but the process should never be glossed over.
Closing the Sale
Finally, it’s time to draw up the final contracts and associated paperwork. Again, all paperwork should be reviewed by your legal team and accountants to reduce the odds of any errors in the documentation.
Begin the Integration
This is the final phase of the sale. Here, it’s always crucial to ensure the integration proceeds as smoothly as possible. Remember, the integration should leave the new organization with the best aspects of both the original company and the acquired one. That’s not always easy to accomplish and often takes some time to accomplish. The Purchaser and the Seller may both be involved in the process, depending on the terms of the sales contracts. It’s natural for company owners to explore ways to move their businesses forward. We could write an entire separate post for best practices for each phase of mergers and acquisitions integration process.
Moving Forward Begins Now
Because so much rides on the success of a merger or acquisition, take whatever time is needed to start planning now. If you’re considering acquiring another company or merging, it’s important to contact a business broker for advice. Advance planning can make the difference between a highly successful acquisition and one that provides lackluster results. Keep these best practices for each phase of mergers and acquisitions in mind, when you want to acquire a business to grow your own.