What are the key factors that make for a successful buy-side transaction?

gap analysis

If you’re planning to merge with or acquire another business, you need the structure of a well-tested mergers and acquisitions (M&A) process. You may have acquired the services of an external M&A advisor or plan to use a neutral third-party business valuation expert like Quantive.

Whichever route you take, you’ll need to be aware of the process and a few hoops and hurdles. Buying a company comes with pitfalls as well as opportunities.

The pitfalls can include everything imaginable—from incompatible business practices in the target business to disgruntled employees worried about the future of their jobs.

Opportunities in M&A arise because:

  • your company can grow faster
  • your business process can acquire missing competencies
  • you can expand your production capacity
  • expanded services and product portfolios can increase your profitability.

The M&A process starts with goal clarification

If you have hired a third-party M&A specialist, your project typically begins with a kick-off meeting at your site. During this meeting, your project buy-side M&A team will explore the strategic direction of your company.

This is the time for a detailed discussion. How does acquiring an existing business contribute to that direction or vision? What is its effect downstream when a sea of changes could take the organization by surprise?

Your prospective seller may have already been located as part of a confidential sell-side target list or could have simply been a ripe grape on the vine of your business network. Whatever the method you used for finding that business you’re after, you’ll need to settle into a timeline and undergo a careful process to avoid the biggest pitfall of M&A: buyer’s remorse downstream

The Steps of a successful M&A Strategy

Step 1: Develop and articulate your M&A strategy.

Your M&A strategy must be both consistent with your business model as well as complement your overall corporate strategy. Your board and investors will want to know how acquiring an up-and-running business is a better approach than growing your own.

Step 2: Screen and identify your target candidate(s) for acquisition.

Determine how your target(s) can help you achieve the growth and increase in profitability you seek. What does the new acquisition bring to your company in terms of established value and downstream market advantage?

Step 3: After the target company is selected, begin your due diligence valuation. The valuation and analysis are complete examinations of the company. Again, you’ll need some third-party expert help on this step. For example, Quantive can be a reliable resource for assisting the seller with gathering all the data and information needed for valuation.

Step 4: Sign a letter of intent

This is where you, as the buyer, put in writing the terms and informally agreed-upon purchase price. Your LOI will include your promise of confidentiality so that your rep can investigate the seller’s company thoroughly.

One pitfall here is that while the LOI includes the term NON-BINDING in all caps when you sign the LOI, you have a “duty of good faith” and implied fair dealing. That duty could be referred to if subsequent disagreements and disputes arise. Again, you’ll need the expertise of trained attorneys during this phase.

Step 5: Ultimate execution of the deal

The LOI needs an amount of detail to be the foundation of the final agreement. You probably will exchange a number of draft versions of the final deal. The normal time frame for this step is 30 to 60 days.

Step 6: Final due diligence.

At this stage, you negotiate the details of the purchase agreement with the seller.

When the LOI is signed, you have anywhere from 60 to 90 days to investigate the seller thoroughly to see if you should finalize the deal. Your investigators will likely do some social and reputation inquiries to get a perspective on the seller’s track record and working style.

You may also need to arrange third-party financing for the deal, in which case the bank will launch its own due diligence investigation.

Step 7: The purchase agreement

The purchase agreement, in addition to fixing the price, also has, or must be accompanied by, some or all of the following elements:

  • details on existing mortgages, loans, or financing details between you and the seller
  • safeguards for seller’s creditors and shareholders
  • tax certifications and state licensing compliance

Step 8: The deal is closed

Within about five working days after executing the purchase agreement, the business changes hands. The deal is consummated, and you transfer the agreed purchase price to the seller’s bank.

Watch for seller performance slippage during the 8 M&A stages

There will be an interim period of fewer than six months from the informal agreement to the close of the transaction. The outgoing owner, probably eager to go from boss to retired person, needs to help you keep the company operating smoothly.

Your range of options includes personal oversight and being alert to problems, relying on the seller’s front-line managers, or, perhaps, offering the outgoing owner a part-time consultancy position to smooth the ownership transition.

Let’s Recap

Most business experts agree that it is far easier to acquire a fully functioning business than to start from nothing. So, M&A can be a fast track for growth and increased efficiency as new technologies mature downstream.

M&A from the buyer’s perspective begins with a clear knowledge of how the acquired business will meet your business goals and synch well with corporate plans and policies. The steps in the process begin with a strategy and culminate with a final purchase agreement.

In between, however, the business valuation of the seller is the lynchpin in determining whether the company has the numbers, systems, and past performance to make it saleable.

At Quantive, we employ a sell-side M&A process that prepares prospective sellers and helps strengthen their market value. We enter the buyer side of the process as a neutral third party so that you can be sure an accurate, current market value is produced in the previously mentioned valuation.

Finally the foregoing was just a bird’s-eye view of the buyer-side M&A process. For a comprehensive and detailed description, see this Newsletter by RKJ Partners, The Buy Side M&A Process: An Overview to Acquiring Companies.

Dan is the Founder of Quantive and Value Scout. He has two decades of experience in leading M&A transactions. Additionally oversees Quantive's valuation practice and has performed thousands of business valuations.



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