Understanding the acquisition process, a complete roadmap. Intelligent business owners often prefer to purchase other businesses to grow and secure their own. Purchasing an existing business comes with a number of benefits as well as potential drawbacks.
An acquisition can help your company develop in a variety of ways, including:
- Through increasing growth rates
- By expanding your market share, or into new markets
- Increasing profitability
- Leveraging economies of scale to boost productivity
Acquisitions are also becoming more popular among entrepreneurs to gain access to skilled employees, innovative and emerging technology, and intellectual property.
However, many acquisitions do not provide the expected results and are unsuccessful since entrepreneurs fail to follow tried and proven steps to success.
It’s critical to pursue a practical acquisition roadmap when planning, implementing, and integrating an acquisition. In this article, we’ll jump in the fast lane and travel through the complete roadmap of an acquisition process, so without further ado, let’s get started.
Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
Here is the content that we will cover in this post. Let’s get started.
- 1. The Business Acquisition Roadmap
- 2. Creating a Strong Investment Thesis
- 3. Getting Ready for the Process of Acquisition
- 4. Be Proactive
- 5. Contact and Communicate
- 6. 3. Locating a Target Business
- 7. On Market Deals
- 8. Off Market Deals
- 9. Pre Letter of Intent Diligence
- 10. Initial & Pre Sale Negotiations
- 11. Understanding the Financing Alternatives
- 12. Purchase Agreement & Due Diligence
- 13. Don’t Skimp on Due Diligence
- 14. Post Acquisition Integration
- 15. Conclusion
The Business Acquisition Roadmap
You can choose to extend an existing company or buy one that might uniquely complement your products or services.
1. Creating a Strong Investment Thesis
You should firstly select what type of business you would like to buy before you begin looking for one. This entails developing the beginning of a general investment thesis.
The criteria you’re searching for in the deal are described in an investment thesis. Consider the following suggestions:
- The business size
- The location you are interested in
- The sectors or segments in which you want to work in
- The amount of time you have to work on the business
- How it will fit into your portfolio or existing company
Make it clear what you don’t want as well. Thus any that don’t make sense can be promptly eliminated. This will help ensure that you don’t waste time and only pursue deals that fit your goals, objectives, and criteria. This is one of the most critical steps of the acquisition process.
2. Getting Ready for the Process of Acquisition
Getting into the right mindset regarding how long the process might take is one of the most important steps of an acquisition process. Transactions that took longer than initially expected are common complaints among entrepreneurs. Even when you follow a well-mapped-out acquisition strategy, the deal can take at least months to close. It could take a year or more.
It’s critical to have a well-structured acquisition process.
You might begin by diving deep into your company’s current state with your management team.
- What are your strengths and weaknesses?
- What are the strategic acquisition objectives, and how do they fit into your overall vision?
A strategic planning exercise is an excellent approach to conducting deliberations, collaborating choices, and brainstorming ideas.
You’ll also want to put together an internal team and external consultants that are well versed in acquiring a company in the early phases of your acquisition preparation. After you get an efficient team for the acquisition process, it’s time to start looking for a target business.
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Many entrepreneurs, in our experience, become very inert in their quest for companies to buy. Surprisingly, according to our study, a mere 2% of buyers communicate directly with vendors.
Contact and Communicate
There is a huge array of successful businesses up for sale on a regular basis. However, you’ll have to search far and wide to locate them. Contact accountants, lawyers, bankers, and business associates about your intentions.
Consider approaching a competitor. Discussing the purchase of a competitor’s company can indeed be awkward. To give yourself the best opportunity, start cultivating trust and create a connection with them as soon as possible. Signing nondisclosure agreements when you’re serious about a future transaction will encourage open communication. Safeguarding the company is an important facet of the acquisition process.
When figuring out the acquisition process, one of the most critical facets is knowing how to value a startup without revenue or with revenue. Knowing how to do that will help you strategize the right bid. Check out this video where I have explained in detail how it’s done.
3. Locating a Target Business
It may take some time to find a good fit, however, don’t overlook the fact that the more time and effort you invest in finding the right business, the better the outcomes will be down the road.
On-market and off-market transaction flow are two distinct forms of deal flow.
On Market Deals
On the market deals are openly published and brokered deals found on online platforms like BizBuySell or LinkBusiness. The majority of buyers start here. They contact the business broker once they’ve found something that appeals to them.
Brokers are very knowledgeable on how to purchase a small business and the acquisition process. Developing a connection with the broker is an extremely bright idea. A solid relationship with these guys can help you locate offers before they’re made public, resulting in cheaper and better-suited companies.
Off Market Deals
Off the market deals are those that a buyer finds on their own by engaging with business owners directly, or through an M&A advisor or banker. This method can take a long time and is often more challenging if you try to do it alone, but it has advantages.
Acquiring entrepreneurs are drawn to these types of deals. Many first-time buyers like the concept of bypassing brokers and other purchasers by directly contacting sellers.
While cutting out the middleman and the individual bidding next to you is tempting, it’s crucial to keep in mind that locating off-market deals takes a lot more effort.
You will have to make a high number of cold calls, send cold emails, and meet up with business owners to find off-market sale opportunities. If you find someone who is interested, you will have to gather all of the necessary financial and legal documentation which is extremely time-consuming.
4. Pre Letter of Intent Diligence
You should first assess the business before ever considering presenting a proposal. During this phase of the acquisition process, you’ll get the answers to crucial questions concerning the company’s operations and finances.
It ensures that the business matches your investing thesis and there are no red flags.
For instance, a company’s earnings have been dropping over the past three years could be a warning indicator. A decline like that is likely not consistent with your investment strategy and should be avoided. A business that generates a large part of its revenue from a single customer is another example of a red flag.
Therefore, pre-LOI diligence after locating a business holds immense importance. You should use financial models that anticipate the business’s performance in the best, average, and worst-case scenarios. After having all of this data, you will be in a much better position to determine whether the effort of putting together an LOI and securing a deposit, together with all of the other details, will be worthwhile.
5. Initial & Pre Sale Negotiations
You’ll want to perform as much research as possible on a potential target before getting into negotiations.
As a buyer, you’ll face information asymmetry since you would never know as much regarding the targeted company as the seller knows about it. Nonetheless, before finalizing the purchase, one of your primary goals must be to minimize the knowledge gap.
Explain why you’re interested in the company and try to learn about the seller’s expectations for a sale price. It would be best to look for basic information on the company’s gross margin, sales, taxes, amortization, depreciation, and any other relevant data. Adequate information is essential for the acquisition process to move forward.
Understanding the Financing Alternatives
A preliminary discussion with your financier about future financing possibilities would be a good idea while looking for information on the target. Most bankers will be willing to look into what sort of offer you might be able to make, given your financial situation. It will prevent you from negotiating a deal you can’t afford, which will be awkward and destructive to your reputation.
Before conducting official due diligence on the targeted company, both parties should sign a letter of intent (LOI). At this point, you should consult with your legal counsel, accountant, transaction advisor, and lender. The letter of intent, while not a legally binding purchase offer, does tend to anchor the transaction conditions to some extent.
You will also have to arrange funding at this point. Internal or external equity (comprising current cash on the balance sheet), loans, and vendor financing are the three most common sources of finance in most transactions.
6. Purchase Agreement & Due Diligence
The next steps in the acquisition process are due diligence and finalizing the purchase agreement. It is when you must set aside your emotions in favor of a cold, complex appraisal of the company you wish to buy.
It’s critical to incorporate your experienced personnel in the company’s research. Here are some of the most important considerations you would need to look into:
- The balance sheet of the company, as well as historical and future profits
- The company’s management team
- Current operations of the company
- Existing owner’s relevance to the company and desire to stay on to assist with the transition
- The cultural fit between your company and the targeted company
- Ability to integrate the company successfully
Don’t Skimp on Due Diligence
The process of due diligence is vital to the acquisition’s success. Therefore cutting corners to save money or fulfill transaction timelines is not an option. To keep your hopefulness regarding the deal, you must also fight the desire to disregard or excuse negative due diligence results.
A multiple of EBITDA is typically the initial point for the sales price, although you would need to consider many other things. These factors include the industry forecast, client concentration, cash flow predictability, and the business’s systematization, like whether it can operate without the existing owner.
After that, the final stage is to finalize the purchase agreement and make any required changes.
Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
7. Post Acquisition Integration
The way you incorporate the newly acquired business into your present one can make or break your business. When you bring the two businesses together, you should have a strategy in place to help you properly merge them, and you should have selected someone to lead the process.
It takes time to complete a merger, and the acquisition process isn’t always easy. Unexpected events are unavoidable. You might require more money, time, or personnel than you anticipated. Having flexibility in your financing strategy and planning for eventualities ahead of time will help you when the unexpected occurs.
You can follow the checklist below to help make sure that the process runs as smoothly as possible:
- Create a high-level picture of your integration plan and follow the blueprint throughout the project.
- Conduct a thorough examination of each company function (e.g., sales, operations, accounting, etc.) to identify which portions of the business will be incorporated, which divisions will remain independent, and which sections will need to be reformed or deleted.
- Understand the emotional, political, and cognitive challenges surrounding the merger to identify all potential hurdles.
- Recognize any legal restrictions that may impede the integration process.
- Determine what must be accomplished immediately and what can be completed at a later date.
- Determine whether consultancy services (for integration project management) are necessary or if you will handle the entire integration process in-house.
- To supervise the integration procedure, you can employ an integration leader.
Acquiring a business is an adventure, but it’s not as simple as seeing something bright and purchasing it. It will likely be a long process. Don’t speed through things merely to get them done. Follow the correct procedures and follow the above roadmap to successfully start and complete your acquisition process.
You now know that it’s critical to follow a practical acquisition roadmap while planning, implementing, and integrating an acquisition. As a result, you will need to devote a substantial amount of your time and work prior to the actual acquisition. Create a strong investment thesis, locate the right business and concentrate on preparing yourself for the acquisition process.
Then, do your pre letter of intent diligence and then proceed with the initial and pre-sale negotiations. After successful negotiations, finalize the purchase agreement while considering your due diligence. Finally, follow the tips set out in this article for a successful post-acquisition integration.
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