Partner Article

Navigating M&A: A Buyers and Sellers Guide

With scaled up deal sizes and increased win rates now accelerating business growth, companies are developing an appetite for even faster expansion through acquisition. With the value of global M&A deals reaching £2.25 trillion in 2014, the highest number since the financial crisis[1] now is a good time to consider such a move. However, where some have succeeded, many have failed.

It is important businesses seek the correct advice on processes to enable successful acquisitions and ensure the best and most profitable outcome for all parties.

Determine goals

Whether a company is in the market to buy or sell, long-term and short-term objectives need to be determined. These will inform the type of businesses that should be considered as targets. Would-be acquirers should ask the following: do I want to add scale to an existing business? This would involve buying a company that closely resembles the acquirer’s company, to expand and increase capabilities, buying power and offer synergies.

Another reason to buy could be the acquisition of new skill sets. This would involve obtaining quality staff with knowledge of the industry who can bring with them successful processes to complement an expansion. In some cases this can mean buying-in an entirely new skill set for the business.

Buying triggers also include gaining access to new customers. By accessing a wider customer base a business can also increase its market share, enabling the cross-selling of existing services to a new audience.

Source the right business

Once the objectives are agreed, a buyer should engage with experienced corporate advisors who can profile potential acquisition targets. This approach ensures that the businesses targeted can help expand offerings, add scale, or provide access to new customers. The culture of the existing business also needs to be considered to ensure suitable targets will fit. Good corporate advisors will also help raise funds with the potential targets in mind.

Appropriate funding

When approached by a potential buyer, a seller should check the appropriate funding can be sourced. Not all potential acquirers will have finance in place and access to finance is often a key reason acquisitions halt. Whilst a buyer will ask sellers lots of questions about its business, sellers should similarly ask them about their business. This will tell them whether the company really has the ability to conclude a transaction.

Understand deal structure and flexible integration

For business owners, it is important to have the flexibility to negotiate integration terms that suit both parties. This entails negotiating whether payment will be entirely on completion or staged, and whether any staged payments are linked to performance (known as an ‘earn-out’).

An earn-out gives the seller the opportunity to further increase the value of the business over an agreed period of time to achieve a higher overall payment.

Due diligence

Perhaps the most important step in the acquisition process is to carry out due diligence, which entails a very detailed investigation of the company being bought. This process ranges from delving into finance to interrogating billing systems; an essential step in identifying how to integrate businesses and the value of the deal itself. From experience, a few things can come out of the woodwork at this stage. It is amazing what you can find buried away in some businesses.

Sellers should prepare by gathering any documentation potential buyers will require, such as past financial statements. The more sellers prepare for this stage, the better the chances are of selling the business.

Manage communication and minimise disruption

Once the structure of the deal has been agreed, it is necessary to plan effectively for a post deal world. It will come as no surprise that the management of communication and minimisation of disruption following an acquisition can be hard. In fact, it has been found that more than half of mergers and acquisitions will fail as a consequence of ineffective integration of information and processes when companies join forces[2].

With this in mind, it is essential that businesses have a clear guide on best practice, and work with an experienced buyer to factor in solid communication with staff and customers to minimise confusion. This will ensure companies are making the most of benefits which are commonly overlooked, such as using existing staff knowledge to its full potential, and also planning ahead for any challenges which could arise.

Without this, the business runs the risk of directly affecting areas such as customer service, account management, and billing, leading to the potential loss of valuable members of the team who fear for their position following the integration.

As mergers and acquisitions continue to rise, what works and what doesn’t will become even clearer. What is certain, is entrepreneurs and business owners navigating the acquisition landscape must ensure they have a strong strategy in place from start to finish.

From my experience with Elitetele.com, following these steps has proven to be a reliable way to acquire and maintain businesses with minimal disruption to staff and customers.

[1] http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11311657/Will-there-be-merger-mania-in-2015.html

[2] Studies by, among others, KPMG, PwC and Deloitte

This was posted in Bdaily's Members' News section by Matt Newing .