10 Factors To Consider Before Making An Acquisition
Is now the right time to grow my business by acquiring another company? Many business owners are asking themselves this question, particularly given the current availability of acquisition financing. The following are practical points to consider:
1) Take time to get to know the sellerOften the most successful acquisitions result from the personal chemistry that has developed from an existing business relationship. It can make negotiations easier, simplify due diligence and provide a barometer for integration potential.
2) Decide whether to hire an investment bankerThe decision whether to hire a buy-side investment banker depends on your knowledge of the pricing of comparable companies in your industry, the analytical capabilities of your financial team, and your need for outside help in identifying the right target.
Bankers with direct pipelines into target companies can be valuable. Fees are usually negotiable and payable upon success. Careful attention should be given to engagement letters with exclusivity terms.
3) Don’t get swept away in an auction processSellers often conduct an auction that can cause a buyer to lose its discipline for the sake of winning. A smart buyer sets its price parameters based on its own analysis of the target’s market and prospects, and how the combined businesses will match up. Sometimes the best deal decision is to pass.
4) Pick the right inside deal leaderWhile acquisitions might begin with a discreet dinner between CEOs, a busy CEO is often not the best management point person for the deal. The deal leader should be a person who can tolerate legal and financial detail, is even tempered and can establish clear lines of responsibility.
5) Make sure your letter of intent is non-binding, except for binding “no-shop” provisionsA letter of intent helps identify key business points and demonstrates to financing sources that the deal is real. Make sure that it is not a binding commitment to complete the purchase without the customary buyer protections found in a final purchase and sale agreement. There should be a binding commitment by the seller to not use your offer to shop for a better deal.
6) Measure pre-closing operations objectivelyIt is not enough to provide in the acquisition agreement that the target will be run in the ordinary course of business between the signing of the agreement and closing. Objective measures, such as seller having a specified net worth at closing, provide clear protection for the buyer and help avoid disputes.
7) Think earn-outsIf you can’t agree on price, consider an earn-out that entitles the seller to deferred payments if the target performs as advertised. Earn-out provisions are heavily negotiated and can dictate how the acquired business must be run and what happens if it is sold or shelved during the earn-out period.
8) Remember to take care of the most important asset: peopleSuccessful buyers often enlist the early support and confidence of seller’s management. Private buyers frequently use creative bonus arrangements, rather than equity, to entice target’s management given the illiquid nature of their stock. For the rank-and-file, a skilled human resources manager can send a reassuring signal by carefully planning a seamless transition of benefits.
9) Begin integration planning earlyPost-transaction integration teams with representatives from both companies should start early on the integration of products and technology, information systems, operations, and employee benefits. The success of this effort will often determine whether the revenue enhancements and cost savings that prompted the transaction will be realized.
10) Crossing the borderWhen acquiring a foreign company, consider the differences in accounting standards, labor laws and environmental regulations. There has also been a rapid growth in strict and contradictory laws that restrict cross-border transfers of crucial business data.
Grimes, McGovern & Associates offers a suite of buyer’s services designed to help you identify, pursue, conduct comprehensive due diligence and acquire target properties. For further information contact, John McGovern, CEO, [email protected], (917) 881-6563.
This article was written by Charles J. Johnson, Choate, Hall & Stewart and originally appeared in the Boston Business Journal.
Grimes, McGovern & Associates provides expert advice during all phases of a transaction. Contact us today for a confidential consultation: John McGovern, CEO, [email protected], (917) 881-6563.
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