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Running an Acquisition Process – How to go about buying another company in 9 steps

by on June 12, 2013
The Food Chain

The Food Chain

I’ve been writing a lot recently on the benefits of growing bigger.  The most relevant piece is Size Matters, and there is also the 7 Steps to Successful M&A or You Don’t Have to Act your Age. So how does one go about buying another company?  It’s a 9 step process.

1. The Acquisition Plan supports the overall Strategic Plan

Acquisitions are done to support the company’s plan, they are not themselves the company’s strategy, and are considered when the company’s plans can be achieved more effectively through some form of combination rather than internal development.  Business combinations, whether acquisitions, mergers, alliances, joint ventures or licensing agreements, are done to support the company’s plan but typically faster than doing it internally and at a reduced cost. This assumes, of course, that you have a Strategic Plan.  Maybe that should be step #1?

2. Form Effective Acquisition Team

The makeup of the acquisition team, the group that will be involved in the acquisition process, can influence the likely level of success.  Teams tend to be more effective when they include managers from key areas; marketing and sales, operations, distribution, and finance.  Teams comprised solely of financial executives often overlook operation issues, while those consisting only of generalists frequently lack attention to detail.  The Team needs to have a point person or Team Leader.  Larger companies have corporate or business development departments. Smaller companies may have to add external advisers for specific skill sets and to allow the managers to focus on their real job.  These advisers often bring the added benefit of objectivity and creativity that internal team members may lack.

3. Create the Acquisition Criteria

Specific objectives for each acquisition should be required to both justify and focus the process.  Typically, these objectives should lead to acquisition criteria and should leverage the company’s current strategic advantages.  Many times the strategic goals also include a minimum required rate of return on capital invested.  Sticking to these goals and objectives is important, and the level of success improves when compensation is tied to the achievement of specific measurements designed around these goals and objectives.

Typical acquisition criteria include  factors such as underlying code, location of target, size of target, impact on cash burn, and integration issues for sales, business, and technology, market position of the target or its products, as well as performance goals.

4. Target Weaknesses may be Acquirer’s Opportunity

Executives should be encouraged not to quickly reject targets that display weaknesses.  Companies will be available for acquisition because of strategic disadvantages ranging from lack of capital to inadequate sales distribution.  These limitations have the effect of reducing a company’s growth and also decreases the valuation.  So the acquisition criteria must not only consider the target as a stand-alone company but how it will perform when it is apart of the acquiring company, and therefore the acquisition criteria should define whether or not to consider troubled companies and under what circumstances.

5. Select Search Criteria

Create the search criteria:

  • Products or services – Seek to acquire a target that has better technology, can fill a product gap, or can expand the line of products.
  • Revenues – Determine ideal size and acceptable range.
  • Earnings – Does the target need to be profitable and if not, what is an acceptable amount and/or period of cash burn?
  • Turnarounds – Will they be considered?  Typically there are fewer possible buyers for these targets and the sellers tend to be more realistic about price.  The lower valuations paid for turnarounds also may provide the buyer more time to achieve synergies.
  • Geographic area – With the globalization of markets acquirers are increasingly interested in targets all over the world.  The target location should fit in with the company’s overall strategic plan.
  • Retain Management – When the M&A market is hot, as it’s getting now, the price required to buy a successful company is higher.  These higher prices often can be justified only through an earn-out, designed to bridge the higher price the seller feels is justified based on its future outlook versus the lower prices the buyer feels is appropriate based on the target’s current status and performance.  Management will need to stay on in an earn-out.

6.  Determine the approach to the Search Process

So how do you find the targets?  Less aggressive companies will likely only consider opportunities that are sent to them by an investment bank looking to sell a client.  If you take this approach, be prepared to look at a lot of companies that have nothing to do with your business.  Also, this approach will probably miss a lot of opportunities, particularly those unknown candidates that are not being considered by any other buyer.    More aggressive companies will go looking for the right target.  Bigger companies will use internal resources.  Smaller companies will use existing management, pulling them away from their real jobs, or they can use outside help.

7. Find Target Companies

The next step is to find prospective targets.  As stated in Step #6 you can be passive or aggressive.  The more common ways to locate targets include:

  • Industry Contacts – Although hit and miss, targets are sometimes found through personal relationships.  This process works best when the desired targets are in the same industry as the acquirer.
  • Outside Advisers – You can tell investment bankers, who represent sellers, what you’re looking for and provide them with your search criteria. The bankers will hopefully, then, show you some of their clients that are on the market that meet your criteria.   The buyer should know that this may generate many inappropriate prospects.  As I stated in You Don’t Have to Act your Age, most investment banks don’t take buy-side engagements so you’ll have to do it alone if you don’t have dedicated staff or you can outsource the work.  The advantages of outsourcing include:
    • The task becomes a contracted performance with a timeline in contrast to something the buyer will do whenever the time can be found or incurring the ongoing expense of hiring a full-time corporate development officer.
    • The contact by an outsourced adviser can sidestep the attempts of prospective targets to qualify the acquirer before the acquirer has determined its level of interest.
  • Searching for the Right Target – With a well-defined criteria sheet, a buyer can search for and approach companies to determine their level of interest.  This process can be more difficult than waiting for the right deal to come along, but it has the advantage of often identifying  targets that are not on the market.  Through this process, exceptional targets may be identified and competitive bidding against other buyers avoided.  After all, the best company to buy is often the one not looking to sell.

8. Establish Guidelines on Initial Contact Procedure

A search strategy also should provide guidelines on how contact with a prospect should be initiated, including control of:

  • Who in the acquirer has access to information
  • What information about the acquirer may be released
  • Strategic goals of the acquirer that can be discussed
  • Personnel permitted to participate
  • Minimum information to request from target

Many of these information-related concerns can be simplified through the use of an intermediary, which enhances confidentiality for both parties and frequently speeds the process.

9. Establish a Walk-Away Price

With this acquisition planning strategy in place, the primary challenge is discipline.  Look closely at  each opportunity to make sure it fits within the broader corporate strategy, then analyze that target’s forecasted risks and net cash flow benefits relative to the price the company must pay to obtain them.  Establish in advance of the negotiations the walk-away price where the project is rejected because the risk-adjusted returns don’t justify the price.  This will greatly improve the success of any acquisition.

Next comes the Letter of Intent, followed by Due diligence and finally Closing.  Then the real work begins: Integration.  More on all of that in future posts.


If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn the 5 step process on How to Quickly Increase Your Valuation: a Proven 5 Step Process.


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