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6 tips for properly planning an acquisition

05 February 2019 by National Bank
Plan a business acquisition

Making a business acquisition is a quick way to grow your company. But this type of transaction also carries several risks. In order to succeed, careful preparation is required. In this series of 4 articles, learn out about the important steps to take before, during and after an acquisition. 

Before the acquisition: Take your time

To survive in a competitive environment, it’s imperative to keep growing your business. Growth can come organically, from an increase in sales and operations, or it can come through acquisition, which may allow a company to scale up more quickly and efficiently and reach a size and positioning that lets it generate greater profits.

Larger companies enjoy several advantages, including being more attractive to customers and suppliers: They know they can count on a partner that is able to meet their needs and expectations. Employees, too, feel that their career prospects are better with a larger company.

Lastly, acquisitions are a quick way to gain access to new technologies, products and markets, plus new employees and customers, while limiting the risk that comes with having to innovate or expand into the unknown.

1- Carefully prepare the process

An acquisition can often make strategic sense, but the process is complex. To succeed, you need to target potential acquisitions that will enrich both the company and its shareholders. Avoiding paying too much for acquisitions, and integrating them quickly and efficiently into the existing business, is key to deriving the maximum benefit.

So the first step involves asking yourself the right questions. It is critical to have a clear vision of why a particular acquisition is the best way to grow your company.

  • Do I want to address a weakness by buying a company that is better positioned in a market that I covet?
  • Do I want to expand my range of products or services, or vertically integrate production?
  • Do I want to achieve economies of scale?
  • Do I want to become larger in order to better compete and offer lower prices?
  • Do I want to gain access to human resources and talent?

The number-one aim of any acquisition should be to strengthen the company’s strategic position. You must establish as clearly as possible what your goal is in making an acquisition. Letting yourself be persuaded that an acquisition you hadn’t seriously considered is a desirable one can be very dangerous.

Once you’ve established your goal, you can start looking for companies for sale that will help you reach the objectives you set out at the beginning.

2- Set up a working group with your advisors

The acquisition process is long and requires a great deal of work and attention. Often, it is necessary to set up an in-house team to manage such a major undertaking. Companies that make multiple acquisitions generally appoint a director to be in charge of acquisitions and set up a team devoted to selecting and acquiring other businesses.

Obviously, not all companies are large enough to have a whole team dedicated solely to mergers and acquisitions. But at the very least, putting one of the company’s executives in charge of M&A is very wise.

Eventually, the acquisition process will also involve your accountants, financial institutions and lawyers. It’s helpful to have your lawyers involved right at the outset, as they can act as counsellors during the acquisition. It is up to you to decide what level of engagement you expect from them.

It makes sense to consult with your team at the very beginning of the acquisition plan so that they can support you from start to finish.

Some accounting firms offer specialized merger and acquisition services. But even if yours does not, it is still important for your accountants to be involved in evaluating and performing due diligence on the targeted acquisition.

Your lawyers, meanwhile, should take part in preparing the documents necessary for making the acquisition. They can also participate in the due diligence, particularly in terms of the state of the target company, the existence of permits, licences or patents, for instance, and the existence of current or possible litigation. In the case of a large acquisition, they will assess whether it raises competition or antitrust issues.

In certain industries, business transfers are subject to government approval. Your lawyer should be able to guide you in choosing which clauses to include in your offer documents and in the acquisition agreement.

3- Work with a financial institution from the start

All acquisitions entail costs, and often, therefore, financing needs. It is strategically important to bring your financial institution on board in the negotiating process right at the outset. This way, it will be familiar with the file and will be able to answer your needs and participate in the necessary financing.

Some financial institutions have teams that specialize in business transfers and are able to provide advice throughout the purchase process. They will attend certain meetings, take care of structuring the financial transaction, coordinate the various stakeholders and support the legal and financial advisors in the preparation of documents. They can also refer you to experts who can evaluate the target company and assist in tax planning.

4- Target the right company

Identifying a worthwhile target is a crucial step. Every now and then, you might stumble upon a very interesting purchase opportunity by chance. But in most instances, it’s best to be proactive and target a company or type of company that fits into a carefully developed strategy.

Stay within your sector

To find the right target company, it’s important to remember that an acquisition made within a sector that you already know well is more likely to succeed. Acquisitions often develop naturally: Entrepreneurs gain knowledge and unique abilities that they can use to run other companies within their field of expertise and generate greater profit than their competitors can.

So the best targets are ones that are in the field you operate in. And the top performers in the sector are also often the companies that are best able to make successful acquisitions.

The best way to identify a great acquisition target is to look around your immediate environment. Most of the time, companies will end up acquiring a competitor, a supplier, a customer, or a company that belongs to the family.

Choose a company you know well

Acquiring a company that you are very familiar with gives a greater chance of success, because it is always difficult to know the true state of any company that’s up for sale. Rare is the acquisition that doesn’t come with a few surprises down the road. Even though everything has been thoroughly vetted, inevitably there are some wrinkles to be ironed out.

Acquiring a company that is well-known to the buyer—because they are part of the owner’s family or the firm’s management team, for example—makes the process much easier. Many of the risks associated with a business acquisition are removed when the buyer or the seller comes from within.

5- Actively search 

It’s not easy to find businesses for sale. Frequently, companies don’t advertise the fact that they would be interested in selling. So, you need to be proactive and rely on networking and specialists to find the right deal. For this reason, once again it’s advisable to stay within your field rather than venturing off into a new market or a new business sector.

Within your own field, as an entrepreneur you can use your network to put out the word that you are interested in finding a company to buy. You will soon know which businesses might be up for sale, and from there you can pick and choose. Another option is to use an intermediary and benefit from their insider knowledge of businesses for sale. Investment banks, commercial banks, firms that specialize in mergers and acquisitions, and auditing firms can be a good source of information about companies up for sale. Unless a market intermediary has a negotiated sales agreement with their client, there is generally no exclusivity arrangement in the sale of companies.

Something to keep in mind: Even though a company may not be for sale, it might be interested in being sold. In many cases, the owner is enticed to sell because a buyer approached them first and showed how a sale would benefit both them and their company. Therefore, if you are interested in a company, don’t be afraid to reach out to the owner—tactfully—to start discussions.

On the other hand, just because a company is up for sale doesn’t mean the process will be any easier. Negotiations can break down, for instance, if the two parties disagree on the price. It is essential to set certain criteria and limits and be willing to walk away from the deal if certain conditions that are important to you are not met.

To be contacted whenever a company that corresponds to your search profile is put up for sale, you can inform intermediaries of your desire to purchase. Obviously, it is essential to clearly state your criteria in order to receive useful target proposals. You also need to make sure your intermediaries are capable of making initial selections based on your criteria in order to avoid wasting time.

6- Establish the right price

The success of any acquisition depends first and foremost on getting the right price for the business you are acquiring. This usually involves paying the company what it is worth. And although the rare pearl will never be sold for a bargain, the risk of paying too much must also be taken into account.

Sometimes, you may have to compete with other potential buyers. Actually, it can be a good sign that there are other suitors, and the fact that a business is being targeted is not a reason to lose interest in acquiring it. But the true danger lies in getting carried away and paying too much, for fear of missing out on a good opportunity.

If there is a formal bidding process, then it’s even more important to establish a maximum price that you are comfortable with and then stick to it. Acquiring the perfect company at a price that’s too high boils down to a poor acquisition, because it will be very difficult to make any money off the transaction and derive any benefit from it.

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