For a company looking to grow, acquiring or merging with another business is a common way of scaling. While you may be successful at running a business, mergers and acquisitions (M&A) are a different ball game needing a different set of skills, research and market knowledge. When you are a potential buyer, you need to know specific aspects of the merger and acquisition process.
While buy-side M&A includes more nuanced processes, it may be useful to refresh your memory on the general buying process.
Despite the pandemic, the global mergers and acquisition market remains buoyant. While macroeconomic factors like inflation, geopolitical nuances and regulatory scrutiny remain concerns, research indicates that 76% CEOs are expecting global growth to increase, focusing on opportunities of value creation through common practices like growth and scaling, but also reshaping businesses through digitization.
Get acquainted with the buy-side of M&A, understand your responsibilities as a buyer and the key elements you must get right to tip the scales of a successful acquisition in your favor. In the same breath, briefly familiarizing yourself with the sell-side M&A process can be helpful.
Find out more: Looking to acquire high-value businesses? Explore MergerVault.
What Does Buy-side Mean?
Simply put, when a business strategically seeks another business to acquire or merge with, they are typically on the buy-side of the acquisition. Buy-side often includes people who raise capital to purchase certain securities, stock, or companies, like private equity professionals.
Before approaching potential merger or takeover candidates, creating a desirable list of attributes will help narrow the field and increase the chances of a successful transaction. Taking the following step-by-step approach will go a long way in ensuring you start the process off on the right foot.
We’ll outline some typical steps a buy-side team could adopt to ensure a successful transaction. While the finer details may differ from deal to deal, the overall template often remains the same.
Step One - Define your Criteria
Your business strategy informs your growth plans. Suppose one of the avenues you have identified is to scale your organization. In that case, it is crucial to have a set of criteria for that purpose. What type of business will help you meet your long-term business growth? Are you looking to expand into new verticals or intend to capture a larger market share within the same market? Other criteria to consider could include:
- Geographical location options
- Niche or market vertical
- Target organization sales
- Business stage - mature, fledgling or start-up
- Business format
- Capital that you have available
Merger criteria should not be set in stone but will likely evolve as you progress through the acquisition process. Having a starting framework will get you started but being flexible will also ensure you get the best deal to help scale your business.
Expect multiple revisions before you complete the new purchase.
Step Two - Compile a List of Targets
Getting to step two without defining your acquisition criteria would be a difficult mission. You will use your acquisition criteria to narrow your focus and identify a shortlist of the most suitable businesses to pursue.
Unlike the residential or commercial real estate market, where buyers actively list a property for sale, high-value targets for sale are a bit different. Owners looking to sell up may only confide their intention to close advisors, including attorneys, accountants, or investment bankers.
As the buyer, you will rely on a team of specialist advisors who may define the acquisition criteria or act on the requirements you provide. The advisors will go out and scour the marketplace for potential bid targets which match your acquisition criteria.
Researching a database of high-value targets can make the process run smoothly. You and your advisors can explore the opportunities available and pick out the ones that align with your strategy before making contact.
Find out more: Need an accurate, trustworthy valuation of a business? Try our free, online valuation tool.
Step Three - Initial Contact
Making the initial contact requires a level of finesse, depending on your lead source. If your advisors recommend a business that’s already publicly for sale, you may forgo some of the sensitivities you would employ if you were making a cold approach. Let’s look at how this would work in either scenario.
You will identify the most suitable acquisition targets after the compilation of a longlist and run through the acquisition criteria to narrow it down.
Next, your advisors will approach the target business through various methods. Typical approaches include LinkedIn, cold-calling, or intermediaries such as attorneys or investment bankers. Using an intermediary rather than a direct personal approach lends greater credibility. It can make acquisition targets more open to discussions.
Keep acquisition activities secret, especially for publicly traded entities, as rumors may cause share prices to rise. However, rising share prices aren’t an issue for private organizations, although maintaining secrecy is good business practice.
Approaching businesses listed for sale
A business already for sale is easier to approach, and they have done most of the groundwork to help smooth the purchase process. It’s still standard practice to let your attorney handle the approach, but it all depends on the size of the business.
Step Four - Preliminary Valuation
Performing a preliminary evaluation will quickly tell you the value the company represents. As much as you’d want to rely on the books and other materials provided by a business listed for sale, you want to perform your own due diligence. This begins by investigating a preliminary value of the business, which you can do using a reliable, online valuation tool.
Your investment bankers possess the expertise to delve into company data and the overall market to produce a fair valuation. You can learn about some business valuation fundamentals by reading our detailed valuation guide.
Discounted cash flow analysis is one of the most employed valuation methods. It involves analyzing the future earning potential of a business, based on stress testing the future sales growth, cost efficiencies post-acquisition, plus many other factors. For this reason, you will need the support of specialist advisors and your investment bankers before going ahead with making an offer.
Step Five - Negotiating Price and Terms
A buyer will make an offer once they consider a takeover target valuable. All discussions up to this point are informal until the potential acquirer delivers a Letter of Intent (LOI) and Purchase Agreement. Negotiations into the details of the LOI will go back and forth until both parties are ready to sign the agreement. You can learn more about negotiating tactics and the process in our negotiating guide.
An LOI formalizes the potential buyer’s interest (also a vehicle of submitting an offer) in acquiring while outlining the terms of the deal. The Purchase Agreement provides more detail into the specific terms which are legally binding. When a potential deal gets to this point, it becomes a cost to both sides, giving more incentive to see the deal through.
While an LOI is a non-binding agreement, it lays the foundation for taking the deal forward, such as confidentiality and disclosure terms. Due diligence can begin once both parties sign the LOI, and the confidentiality clause kicks in.
Preliminary due diligence can only use publicly available information to reach a value consensus. Detailed due diligence allows potential buyers to look a little deeper and prod a little further into the financial health of the acquisition target.
Step Six - Due Diligence
There are questions every buyer should ask themselves when pursuing an acquisition target. After signing the LOI, the formal due diligence begins and should provide you with answers to the following questions:
- Should you be buying this business in the first place?
- Are you paying the right price for the company?
- What structure should you have in place for this acquisition?
- What comes after in terms of operations, accounting and legal?
Working with a seasoned team of advisors and professionals at this stage of the acquisition process will make sure you avoid some of the common pitfalls. Do not rush due diligence.
The time you commit to carrying out the due diligence is time well spent. Although it may be tempting to gloss over this stage and rush to secure a deal, it pays, in the long run, to take a marathon and not a sprint approach. Due diligence roughly falls into the following categories:
- Financial due diligence
- Operational due diligence
- Legal and HR due diligence
- Intellectual property due diligence
Each of these categories is critical to the success of the acquisition and the future of the combined entity. Ultimately, you will need specialists in every one of the fields above, so make sure your deal proceeds without a hitch.
Due diligence is like an insurance policy. A bid target may look great under the hood, but it’s only until your advisors have taken everything apart that you can tell if you have a deal or not.
Acquisitions are more than for the monetary value. You must ensure a strategic or cultural fit for the new entity. If anything can jeopardize your existing organization or the new one, don’t be afraid to pull out of the deal.
Step Seven - Securing Finance
Upon completion of due diligence and you’re satisfied that there is value in the acquisition, you need to revise your offer or alter the terms of the deal. Although this is not always necessary, some revelations during the deep dive may have revealed some aspects of the business which lower its valuation.
Once you make any changes to your offer and the buyer accepts them, it’s time to make sure you can provide the seller with proof of funds to complete the transaction.
Typical methods of funding an acquisition include personal savings (for smaller transactions), bank loans, shareholders and investors or seller financing. Seller financing is becoming more common as sellers seek to exit while funding the sale with a stake in the combined entity.
If you have had your investment banking team inside from the onset, securing finances should be a smooth process. We share some of the other methods buyers can use to raise acquisition capital in our securing finances guide.
Closing the Deal
Mergers and acquisitions, both big and small, generally follow the step-by-step process detailed above. You can consider the deal done once both parties are happy with the terms of the agreement (usually after further negotiations) and the paperwork is signed off.
If the execution of the preceding steps has been flawless, the deal closing often goes without a hitch. However, poor due diligence by the buyer or even inadequate disclosures on the seller’s side may hamper the successful close of an acquisition. This point highlights the importance of turning to the right professionals for support and advice.
The prospect of growing your business is exciting, especially when you are looking to do so through acquiring a complementary business.
Being on the buy-side of means there are specific steps you need to take to ensure a successful close and the best foundation for the combined business. The most important takeaway is understanding why it’s vital to work with a team of specialist advisors who can help to avoid frustrating and sometimes costly mistakes.
Get in touch today to learn more about how BusinessesForSale.com can assist you in your purchasing journey.
Find out more: Want to know more about the sell-side of M&A? Read the seller's perspective in mergers and acquisitions.