Strategic Mergers Acquisition M&A Process

Strategic mergers and acquisition process

Mergers and Acquisitions (M&A) is a process involving the acquisition of another company, where one company, usually the larger acquires a smaller target company and merges them with their business. This can sometimes happen between two businesses of a similar size which is more often called a merger when management teams from both companies control the new company. More often than not, the larger company acquires the smaller company and their management team controls the acquired company, or oversees it.

Acquiring a company has several steps in the process, quite often the acquisition can be performed quite quickly, in perhaps less than a month from finding the company to closing the deal, if you have a motivated seller. Other times it can take several months or years to complete the deal, depending on the size and complexity of the companies involved.

The process starts with defining the strategic opportunity the acquiring company is looking to get, it could be that they’ve hit a pitch ceiling with a client and are unable to win larger contracts unless they have a bigger turnover, or it could be that the company is wanting to move into a new industry or vertical, or it could be that the business has built up a war chest of money and rather than leave it in the bank will acquire another company to add to their bottom line and make their money earn.

It’s important to define the strategy first before making a search as the best deals are often off market, or businesses that haven’t put themselves up for sale. Opportunistic acquisitions rarely work out, either the deal won’t close for whatever reason or it does close but differences in culture or long term goals cause problems within the larger company.

Here’s an overview of the M&A process to help you understand if your business is ready to complete an acquisition or merger.

The 10 Step Strategic Acquisition Process

Strategic acquisition searches are often completed by outsourced companies who specialise in creating M&A deals, like Capital A, or for larger companies this could be performed by an investment bank. The dealmaker will often work with the Chairman and CEO or Corporate Development team using the following process or something similar.

10 step M&A process will typically be:

  1. Define the acquisition strategy – Decide why you are acquiring a business and what you are looking to achieve, what is the end result you are looking for
  2. Set the strategic acquisition search criteria – You need to know exactly what you’re looking for, type of company, turnover or profit margin, number of employees, location, is it growing or distressed, etc
  3. Search for acquisition targets – Contact influential movers and shakers in your network and perform an intensive search based on the above criteria, you can also advertise that you are making this search so opportunities can come to you. You can use Google to search for companies that fit the search strategy and check on Companies House, Duedil or CompanyChecker to find financial information
  4. Contact targets that fit – This is the hard part, making contact with targets that fit the search criteria can be a long process, you should meet the principals involved in the company and start a conversation with them around the topic of being acquired
  5. Perform a valuation of the target company – Once you have met the acquisition target’s owner or CEO and they have agreed that they are willing to discuss further you should request more detailed financial information, quite often this will come with the current owners interpretation of the finances, while this can add some colour to the numbers, you shouldn’t allow it to influence your valuation
  6. Offer and negotiation – Make an offer based on your valuation, make sure you leave room for negotiation, don’t ever feel like you should offer exactly what you’ve calculated it’s worth to expedite an agreement as there will always be some negotiation. Business owners always think their business is worth much more than reality based on years of reading about unicorns. You should have a heads of terms agreement drawn up, this is an overview of what has been discussed and agreed but is not legally binding
  7. Due diligence – Although you will have performed some preliminary due diligence during your search, once an offer is made you should now perform in depth due diligence, this part of the process ensures that any information given during the initial stages is accurate
  8. Purchase agreement contract – If everything is OK from your due diligence then you now draw up the Share Purchase Agreement based on the heads of terms agreement made earlier and any changes based on revelations from your due diligence, this can be long and expensive using lawyers who tend to want to go back and forward over everything (and charge you for the privilege) it is best to have everything clear with the seller by phone or face to face so keep fees to a minimum
  9. Organising finance for the acquisition – You will have perhaps already started organising your finances to cover the acquisition before now, but quite often if you are requiring debt finance the lender will require all the information from the previous steps and a signed contract to continue
  10. Closing the deal and handing over the keys to your newly acquired company – You are now the proud owner of a brand newly acquired business, once the paperwork is done the process of gaining control of the pieces of the business begins. You will have to integrate the new business into your own company structure (if you have one), onboard your new employees and take control of the company finances

Valuing a business

There are many different ways to value a business, quite often you will have heard about ridiculous valuations in the news, but in the real world companies are valued based on much smaller multiples. Industry averages can be found online to give you a guide as to what your offer might be. A general rule of thumb would be for small businesses $1 – $5m t/o would be 3.5xEBITDA, $10 – $100m t/o around 5-8xEBITDA and anything larger is likely a industry consolidation of some type and the acquiring company can pay much bigger multiples to stifle any disagreements from the acquired boardmembers. Although these multiples can be handy rules of thumb, every industry is different and every business owner has their own ideas.

Structuring the acquisition deal

There are many ways to get to a deal, quite often the seller will just want you to give them loads of money so they can walk into the sunset and leave you with whatever headaches they had been dealing with, but this rarely happens. You should structure the deal so that you are safeguarded for as many eventualities as you can negotiate. The deal is often made of several slices like a badly cut pizza. You should offer an amount up front on closing of the deal, leave some of your payments to continue over a certain period, this could be several months for a small deal to several years for a larger one. This is to make sure that any warranties the seller has given you have long enough to be tested, quite often sellers want to get out of a business with a problem approaching on the horizon, the seller will be motivated to deal with the problem with you if required if you still hold onto some of their payments. You may have structured the deal so that the business can finance the future payments leaving you with less pressure to raise money when closing the deal, a good advisory will help you with getting a deal structure that suits your financial situation.

M&A advisors during the process

It is possible to go it alone and complete an M&A deal from end to end on your own using your own hard graft, some Google searches and readymade agreements, however if this is your first time it’s not advisable to do everything yourself. Larger companies may want help building their acquisition pipeline and will use a company like Capital A to introduce them to a larger pool of acquisition targets. Making searches for targets can be a much longer process than you initially expect and if you are a CEO or owner/operator that already has a full plate then adding another job to your long list of things to do is not always the smartest thing to do. Then there is legal help with negotiating contracts, if you are a company of a certain size it goes without saying that you will need a lawyer involved, BUT make sure your legal advisor has some M&A experience under their belt, if you have to hire a new firm that isn’t your usual legal advisor then do it early on in the process. Finally, you may want to hire an accountant that has due diligence experience, often entrepreneurs feel they can understand someone else’s financials easily, but if the target company is from a different industry then you should think about hiring someone.

The M&A process

The acquisition process isn’t as complicated as some professionals in the banking and legal professions would like to make you think, so if the business is small enough then it should be OK to do the bulk of the work yourself or with your team. Glean what you can from the internet and get out there and get some experience, follow this general acquisition process guide and you’ll be OK. If you find the strategic acquisition search process is tying up your time then maybe we can help.