Buying a company? Here’s what you need to know

Before the pandemic, it was a strong sellers’ market, leaving many prospective acquirers on the sidelines. But recent events have changed that for many industry sectors. We are now in a window of opportunity for acquisitions at lower valuations than in recent history. For those CEOs who wish to grow through acquisitions, now could be the best time to execute transactions for the foreseeable future.

When executing an acquisition strategy, the commodity most wasted is time, resulting in opportunity costs. Given that this window may be short-lived, it is important to be laser-focused on finding the right acquisition opportunities that have the highest probability of helping you achieve your strategic objectives. Below are some points to plan and execute an effective acquisition strategy:

1. Define your investment thesis

Before speaking with any prospect, you need to know why you are reaching out to them. The investment thesis articulates the company’s profile you seek to acquire, identifying the company’s size in revenue, EBITDA, and employees; target geographies; desired product or service lines; management team and employee considerations. The investment thesis should define what “success” is, which could be measured in increased revenue and/or EBITDA, employee retention, or client retention post-transaction, among any number of metrics that demonstrate achievement of the strategic objectives. It is the prism through which the prospects are evaluated as potential acquisition targets.

2. Create the financial model

Part of evaluating a potential transaction is modeling the pro forma financial statements for the combined entity. The model should show how the acquisition will impact organizational performance as a consolidated business and the inherent risks to be considered. It is helpful to model a combination with a prototypical organization that is described in the investment thesis, building in the amount of debt that might be necessary to complete the acquisition. This will help identify where the risk could be too high or the reward too low, requiring adjustment of the investment thesis. The financial model is a fundamental tool to evaluate each potential acquisition. Build in the financial data of each target as they are assessed to properly understand the risk/reward of each potential investment.

3. Be realistic about price and terms

Just because the markets have gone through some tough times in 2020 does not mean that a buyer should expect to get good companies cheap. In many sectors, market multiples have come down off recent highs, which is a good time to buy. But expect to pay the market rate for a good prospect. There are reasons that a company is willing to sell for below market, and those reasons are typically ones to be avoided.

4. Plan integration now

It is amazing how few acquirers plan for integration of the company post-transaction. Good integration planning and execution is a key determinant of successfully achieving the strategic objectives of an acquisition. Identify the integration team well in advance of an actual acquisition plan for organizational, operational, financial, and technological integration. Everyone has heard the statistics about acquisitions failing to live up to the objectives; that is more often a result of poor integration planning and execution.

5. Have a good story

If a prospect is sufficiently attractive for you to speak with them, then others are probably doing so as well. And how many times have you instantly deleted a message from a buyer because it did not “ring your strategic bell?” The story needs to concisely make it clear that your approach is a carefully considered discussion about a strategic fit that is good for employees and clients, establishing that a combination has benefits well beyond just financial reward.

6. Find proprietary deal flow

The simple fact of the matter is that companies running a process with an investment banker usually get higher prices and better terms for their companies. While it is true that represented companies are often better prepared to sell and may be more committed to selling, they also will likely cost more. It can prove more economical to find the “proprietary deals” – companies that are not represented and can perhaps be acquired for more buyer-favorable terms. Also, make sure the target list is representative of the participants in the market, not just the ones you most readily know, so that the optimal result can be found.

7. Thorough due diligence is critical

Good due diligence takes time and costs money. Be willing to expend both to adequately protect your organization. It is crucial for the buyer to fully understand what they are buying. Where applicable, pay for a good quality of earnings report, assessment of HR practices, IP assessments, inventory value and obsolescence, environmental diligence, client and vendor diligence, market diligence, etc. Unexpected surprises after a transaction closes can range from costly to catastrophic to existential, all of which would be much more expensive than spending the time and treasure on thorough diligence.

8. Be prepared to move crisply

The old adage “time kills deals” applies in these types of transactions. The buyer should be thorough in vetting an opportunity to avoid risk, but they should move quickly to count them in, move through to close, or promptly count them out. If they are a good fit and survive diligence, document the transaction and close it. Otherwise, count them out and move on. Time is a precious commodity; don’t waste yours or theirs.

The points above help a buyer avoid a major danger of acquisition efforts: Shiny object syndrome. Without a carefully planned and executed acquisition strategy, buyers tend to jump from one shiny object to another without really understanding why they are engaging with them in the first place, which leads to wasted time and costly mistakes. If growth by acquisition is the strategy, then crisp but carefully planned execution often results in optimal strategic outcomes.