The decision to get into mergers and acquisitions may sound like a big business concept. But there are several advantages to conducting your own acquisition. The key to success is to have a plan and a way to measure the outcome of this exercise. If you do that, there’s a good chance you’ll quickly expand your business. The first step is knowing when the timing is right.
When to Acquire a Business
When your business is ready to expand and has the financial health to do so, you are ready to look at making an acquisition. Like any other business decision, such as capital purchases, personnel hiring, and marketing campaigns, the decision to acquire another company should be part of a larger plan and come with a way to measure its success. In other words, have an ROI equation ready to go.
Why to Acquire a Business
You acquire another company for several reasons:
- Growth: Buy a company’s revenues, or step into a new geographic market. You may also vertically integrate part of your supply chain, adding both new revenues and creating new efficiencies.
- Competition: If you can’t beat ‘em, join ‘em. Get your competitors to join you through an acquisition.
- Resources: You may need talent, technology, or access to product lines.
How to Acquire a Business
- Have a Plan
- Know the industry and the market
- Come up with a valuation model to value the other business and value the new business after the acquisition
- Get a target list of potential acquisitions
- Have your financial model ready to go, including the actual funding sources
- Put together an acquisition team that includes the following:
- You, or the acquiring business President/CEO.
- CFO/Accountant: Someone to evaluate the financial side of the transaction and to run due diligence on the other company’s books.
- Business Advisor: Somebody to get a good idea of how the other company is being run and identify new opportunities for profits and revenue.
- Attorney: Make sure your contract is good and doesn’t present problems in the future. There is also background checking to do on the officers and company you’re considering acquiring.
- Functional Experts (HR, IT, etc.): You’ll want your experts involved to make sure there are no challenges to merging systems, data, etc.
- Subject Matter Experts: Bring along a line manager, an engineer, etc. to cover the core of what you do.
- Due Diligence
- Identify the reason the other company is selling.
- Have they tried to sell before? Why didn’t it go through?
- Finances: Get last year and year-to-date Profit-and-Loss, Balance Sheet and Cash Flows. Also get their current projections. Have your account comb through those.
- Get a personnel chart and decide who stays, where they will go, etc., including the financial impact of new salaries, severances, benefits, etc.
- Legal: Look over existing contracts with vendors, customers, etc. Make sure all the corporate papers are in good standing, as well as taxes.
- Customers: identify some key metrics to measure the value of their existing customer base. Consider lifespan, churn, spending, growth, etc. If possible, get an idea of customer satisfaction and experience.
- Make Initial Offer: Using your models and your team, including the attorneys, put together your initial offer.
- Negotiate: Be prepared for a counteroffer. Consider what you might do in their shoes and be ready to make your own offer. Remember to have a point where you’re willing to walk away from the deal.
- Agreement: Have your lawyer draw up the contract and include a list of ALL the terms that make this a great deal for you. It’s up to the other side to line those out. Many won’t.
Your Acquisition Strategy
If you’ve gotten this far, you may be thinking you’re business is ready to make an acquisition. If so, set up a time with us to review your situation and put together your acquisition plan. We’ve done this several times with our clients and have recently conducted our own acquisitions! Call ASCEND Business Advisory at 888 297-3321 now, or set up a complimentary consultation!