It's a well known statistic that approximately two-thirds of acquired businesses fail. While these stats are based on publicly traded companies with failure measured by loss of equity value, there is no reason to believe that the failure experience is any different for private companies. The statistics are daunting; however, companies continue to be acquired for a variety of good reasons and not all acquisitions fail. While the success or failure of an acquisition is often based on post-purchase issues (such as the melding of company cultures), there are five strategies that can help you beat the odds.
1. Strategic Acquisition Plan
First and foremost, understanding the motivation for acquiring a company is the first step to a successful acquisition. If the reasons for purchasing a company are clearly stated and supported, that laser-like focus will help: guide your purchase decisions; communicate your objectives to employees, service providers, and potential companies; and provide a benchmark to measure your success. To clearly define your motivation, ask yourself:
- Are we buying a company instead of growing organically because it is faster, easier, or less expensive than developing new products or expanding our product offering?
- Are we taking out a competitor to add revenue and cut costs?
- Are we acquiring for strategic reasons to realize that large hairy audacious goal?
- Are there advantages to vertically integrating our product for a more complete offering?
- Are we acquiring to expand our geographical reach?
These questions can be answered by developing a strategic acquisition plan that provides a framework for growth, as well as identifies potential acquisition targets. The plan should include an assessment of strengths and weakness of your company, and describe the strategic framework in which your company fits, specifically, a description of the life cycle of your product. For instance, if your company is a food manufacturer, you might want to examine your position in the farm-to-fork lifecycle. The plan should assess your current and potential competition, and demonstrate an understanding and evaluation of market trends. Information and in-depth assessments of your industry sector and market trends can be fund at many research firms. Also, if a public company is in your industry sector, there is usually research available from the investment banking houses. You might want to consider engaging a consultant and/or an intern to help with research and the assessment of your companyís strengths and weaknesses, and to help formulate the strategic acquisition plan.
2. Acquisition Criteria
The strategic acquisition plan provides help in identifying subsectors to look at for appropriate companies to acquire. Developing specific acquisition criteria not only focuses the search process but provides a marketing and communication vehicle so that others can be on the lookout and refer acceptable candidates. The acquisition criteria should include specific industry sector, revenue and cash flow parameters, location, majority/minority investment preference, and any other criteria important to you. Good sources for finding acquisition targets include industry associations, trade shows, publishers in your sector, searchable databases such as Dun & Bradstreet's Million Dollar Database (dnbmdd.com), and private equity databases of portfolio companies such as Capital IQ (capitaliq.com). Your vendors are also an excellent resource for identifying potential acquisitions.
3. The Acquisition Team
Once the strategic acquisition plan and the acquisition criteria are developed, honestly assess your management team's talent and bandwidth to plan, find, negotiate, integrate, and manage an acquisition in addition to their current responsibilities. This also applies to the outside professionals, such as accountants and lawyers, who have been advising your company. Adding talent at the start of the acquisition journey contributes to the knowledge base and bandwidth to successfully integrate the acquired company. In addition, the most successful acquisitions Iíve seen are ones where a deal team has been formed. The deal team consists of the CEO, the key individual in the company who is the inside team leader (usually the CFO), the investment banker, the outside accountant, the outside M&A attorney, and an outside tax expert.
I don't recommend pursuing acquisitions without the help of an investment banker. An investment banker will have valuable input to the strategic acquisition plan and acquisition criteria and will assume leadership of the process. You want someone representing you who is experienced in your sector and has completed a lot of deals.
4. Financial Due Diligence and HR Issues
After the target company is identified and it is determined that the owner is willing to sell, you will probably be issuing an Indication of Interest (a nonbinding offer letter). If your offer is accepted, the next step is to do due diligence on the target company. You should do this carefully, as you are trying to verify the information supplied to you to support your offer. Your investment banker should be developing detail models to evaluate your return on your investment. These models will also provide benchmarks so that you can measure the acquisitionís future performance. If you are borrowing money to buy the company, your lending sources will require this analysis.
In addition to financial due diligence, you should be reviewing human resource issues such as independent contractor status, vacation accruals, benefit commitments, legal issues, customers, marketing materials, intellectual property, deferred revenue, and taxation, to name a few. Your investment banker and deal accountants will be leading the effort, but you can't just delegate to them, because after the deal closes you will be responsible.
5. Purchase Agreement
After due diligence, it is customary to give the sellers a Letter of Intent, which is a binding agreement (subject to the completion of a satisfactory purchase agreement) to purchase the company at a stated price. However, the deal isn't done until the purchase agreement has been signed and money has been transferred. In my experience, the devil is in the details. After your Letter of Intent is accepted and due diligence has been performed, your or the target's lawyers will be drawing up the purchase agreement. There is a lot of negotiation on both small and large issues that goes into the purchase agreement such as negotiation of escrow accounts, working capital adjustments, earnouts, and so on. Many a deal has fallen apart at this stage, in part because the lawyers are involved in negotiating the agreement terms, which adds more complexity and the human element to the mix. This happens because, in many cases, the line between a business issue and a legal issue is blurred. Your investment banker should be managing this process and on the lookout for these stumbling blocks to keep the deal moving along. The negotiation of the purchase agreement is the first example of the impression the executives of the target company will have of your company. Therefore it is a balancing act of getting them to feel comfortable with you, but at the same time, protecting your interests.
While each deal is different and there are no absolute predictors of success, all the successful deals I've seen incorporated these five points. Acquiring a company is time-consuming, complex, and not without risk. However, there is no reason it can't be successful if the business decision is approached in an organized fashion and the appropriate professionals are engaged to help with the process.
Gail Lieberman is the founder and managing partner of NYC-based Rudder Capital, which provides corporate finance advisory services to small and mid-size companies in the service and technology sectors. She can be contacted through ruddercapital.com.