10 things for a successful buy-side M&A experience

April 9, 2021

By Craig Herbst
Partner

COVID-19 slowed merger and acquisition activity, but it is picking up again.

M&A can be a great way to take your business to the next level. However, most deals do not cover their cost of capital and do not get the desired results that were intended at the outset of the process. Poor preparation, inadequate integration and bad timing often are the culprits.

In our experience, considering the following 10 items will help you avoid these errors and have a much larger chance for success post-close:

Strategic intent: Being clear on the reasons you want to acquire sounds simple and straightforward, but many people do not ask themselves why before they buy.

Finish this sentence: I want to buy this business or target because …

If you can’t answer this, perhaps it’s not time to acquire a new business. Without clear intentions, the rest of these points do not matter.

Competition is not your friend: Competition among buyers is only good for the seller. Multiple buyers looking at a target results in a bidding war and possibly a price increase. After a bidding war, you might have started out with a four or five times EBITDA offer, only to end at eight or nine times EBITDA.

Beware the superstar owner: Be honest with yourself about the owner’s influence on the company. Evaluate how much of the business’ value is tied up with the owner’s knowledge, connections or way of doing things. The owner will eventually exit, and if the company is reliant on the owner, substantial value will go with them.

Synergies: Try to keep synergies for yourself if possible. Assess where synergies might exist and have a plan — keeping synergies reduces risk. When synergies are realized it creates more value. Depending on the combination of synergies and how well the target fits into your current operations will dictate how quickly you can recognize these advantages.

Some examples include:

Revenue

  • Increased volume.
  • Increased pricing.

Costs

  • Decreased fixed costs.
  • Decreased variable costs.

Capital

  • Reduce fixed assets.
  • Improve working capital if divestiture of real estate exists.

Other financial

  • Evaluate a better tax position.
  • Increase borrowing capacity.

Maximum pricing: Going into a deal with a maximum price in mind is crucial. Base your price on realistic financial analysis. Complete due diligence work to determine finances and prove it through a three- to five-year analysis.

Evaluate when it’s best to walk away and do not go above your maximum price. A higher price equals a higher risk, lower return on investment and can impact both borrowing rations and free cashflow.

Financing the deal: Never do a deal that would weaken your balance sheet. Using large amounts of cheap debt may seem appealing, however it increases post-close risk. A combination of both cash and debt is ideal.

Deal structure: Asset sales are typically the best — but not always. Most people buy assets for tax purposes; however, sometimes the asset sale might not be the greatest option. If the target has specific agreements that aren’t easily transferred, a stock purchase could be best. It is crucial to weigh the pros and cons.

Asset concentration issues: Significant post-close risk involves concentration issues. Five obstacles in concentration areas that occur frequently are customers, industry, technology, suppliers and raw materials.

Many companies get an outsized portion of their revenue from only a few large customers.

Be aware of whether the business is tied to a limited number of suppliers or not.

Ensure key employees are on-board: Many times, a handful of key employees add outsized value to the business. It’s important to establish who these employees are and ensure they will stay.

Execute integration

After the deal closes, the real work begins — integration. Often, there is no right answer when it comes to integration. While nothing can guarantee a successful acquisition, these tips can significantly increase your chances for success.

A substantial amount of value can be lost if integration isn’t done well. Focus on people, processes and systems.

People: Understand the new acquisition has its culture. Merging will take time. There always will be anxiety with new and old staff so communicate and be transparent.

Processes: Build on the current operations with respect for what the acquisition has built. Consider the acquisitions’ processes and best practices — do not assume yours always are the best.

Systems: Consider the benefits of merging accounting, manufacturing, CRM and other systems to fully unify the organizations. This could take some time.

There is no foolproof recipe to making sure every acquisition works out every time. However, being knowledgeable, addressing these 10 items and having some discipline increases your chances of having a successful transition. Buying a business can be exciting, and getting a strategy in place will increase the likelihood of the outcome desired.

This article was previously published in the Tri-State Business Times.

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