When is a merger or acquisition right for you?
A company is ripe for merger or acquisition when it has matured, but not maximized its market or has other impediments stopping it from becoming a market leader.
This requires a certain amount of realistic estimation of future performance from all parties, which is why the merger and acquisitions field can be a daunting process. There are generally three types of deals: deals for talent or technology, deals for products, and deals for entire businesses (including all operations, customers, intellectual property, employees, etc.). The process involves a complete analysis of the market, business metrics, competitors, valuation and future growth.
Some benefits of conducting a merger or acquisition:
- Acquire talent: It's a quick way to bring in a large group of new quality staff or skills. This is particularly helpful if you are looking to expand into a new geographic area and want to quickly acquire individuals who know the market.
- Acquire assets: Building completely new production, supply chain or distribution facilities can be more expensive than buying a marginal company outright.
- Acquire customers: Existing customers generally come along with a product or company acquisition.
- Expand product line: Merging with a company that has complementary products or services can create synergy for both business lines.
- Reduce costs: Growing your company usually creates economies of scale (as long as you avoid management bloat) by sharing costs and purchasing power.
Some possible problems with conducting a merger or acquisition:
- Redundancy: The new combined company may have duplicate functions that need to be eliminated to save money.
- Instant growth: Your management structure needs to be ready to take on greater responsibilities instantly.
- Increased debt/obligations: When acquiring a company you also take on its debt, payroll and other obligations.
- Over-estimate of market size or cost savings: A good merger plan still includes some assumptions and projections that can turn out to be wrong. You're risking a lot of money on those plans, so comprehensive due diligence is more essential than ever.
- Regulatory issues: Combining products and services to grab a large market share can run afoul of agencies such as the Federal Trade Commission if there is potential for creation of a monopoly.
For Buyers
Engaging in a Merger or Acquisition
Engaging in a merger or acquisition is a long and complicated process. If you do not routinely engage in such deals, the most important step you can take will be to secure the services of a business broker that has all the requisite contacts with attorneys, accountants, valuation specialists, and market experts. They will take you through these steps and have insight and knowledge that will save you time and money.
General steps you will need to take while approaching a new deal:
- Develop a strategy: Even if you have a merger or acquisition target in mind, your overall strategy should analyze all the alternatives. Could you accomplish the same goal on you own? Do competitors of your target offer better measurables?
- Analyze the industry and the market: Find hard facts that confirm or deny your instincts about the market and industry. You may have a lot of experience with a particular market from your own company's perspective, but you need unbiased analysis as well.
- Develop criteria for a “good deal”: Have numbers and results in mind before you approach the target so you negotiate from a firm baseline.
- Profile all potential targets: Even if some seem out of reach, do your research on every possibility. You may want to rank them based on desirability or ease of getting a deal done.
- Engage in communication: Depending on the company, you will want to choose your approach carefully. Can you meet the owner at an industry or social event or should you begin with formal correspondence? If successful, this initial contact should lead to a letter of intent and legally binding non-disclosure agreement and an agreement outlining broad strokes of the potential deal so you can secure access to their financial information.
- Due diligence: Lawyers and accountants examine their records to confirm your initial research.
- Negotiation: Once you have a full working knowledge of the target, adjust your targeted goals begin the back-and-forth.
- Execution and integration: A fully realized deal is just the beginning and many targets will not even enter into the negotiation phase without some idea of what will happen to their company. So it's wise to have a plan in place for disposition of assets, employees and customers.
Some companies and information sources on full-service M&A consulting:
For Sellers
Initiating the Sale of a Company
If you plan to initiate the sale of your company you are most likely going to need the services of a mergers and acquisitions adviser. This is a company with specialists in multiple disciplines and experience preparing and marketing a company for a potential deal. Their areas of focus will include (not necessarily in this order):
- Appraisal: With a comprehensive analysis of your company's assets, products, market share, debts and projected growth, an experienced appraisal will help you set the price range and valuation that your company should expect in a deal.
- Records analysis and organization: Accounting professionals will analyze and prepare your financial documentation for presentation, assuring that they are complete and will stand up to scrutiny during due diligence.
- Summarize current business plan: They will prepare an in-depth document (along with Executive Summary) of your current approach and all active lines of business.
- Pre-qualify for financing: Although you won't be taking out new debt on your own, buyers will want to know how outside entity's feel about the company's creditworthiness. Doing this ahead of the deal allows you to present the results as a potential benefit of buying the company.
- Marketing: Probably the most critical step – and most important to get right – is preparing the message of your company's stance regarding potential deals and then getting it out to the right people. An experienced advisor will know how to comb the market for potential buyers. For more info, visit Prophet.com on M&A Marketing
- Contact, qualify and secure the buyer: Unless you are approached personally by an unsolicited offer, this is an incredibly important step for the buyer. The advisor must find the right purchaser, determine if they are serious and capable of securing a deal, and then bring the deal to a close with satisfaction on both sides.
How They Get Paid
One of the potential downsides of securing an M&A advisor is that they typically work on a retainer basis rather than (or in addition to) a commission. This is because they do a lot of work to make sure you don't make the wrong deal. It could be long months (or never) between securing their services and closing a deal, and you usually end up paying monthly fees throughout that process. In fact, according to an article on Forbes.com M&A advisory firms average less than one finished deal a year, so they are surviving on those fees rather than by deal-making. This presents a double-edged sword between their incentive to get you a deal vs. keeping the process going. Also, fees are not typically disclosed publicly. Exits.com looks at the fee structure in this post .
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