“We’re trying to do an acquisition, but as we get into the opportunity there’s one surprise after another. Seems like it’s always something else, and not necessarily good. Should we keep on pursuing this deal? Is there any such thing as a good acquisition?”
Thoughts of the Day: Growth by acquisition can be a good way to expand. Buying a company is a process. Figuring out a fair price is essential. Careful due diligence is where and how you vet the deal. Don’t pay more than the deal is worth just because you spend a bunch of time and effort pursuing it.
Adding to your company by acquiring another can be advantageous as long as You don’t over-pay; You can take over the assets you buy without losing control; You can leverage the assets you acquire into something more valuable sufficient to pay off any obligations from the deal and make a profit on top.
It takes time and lots of steps to get a deal done.
- First there’s the initial offer, then the letter of intent.
- Due diligence is where the Buyer vets the assets and liabilities being conveyed.
- Closing happens when a final agreement is hammered out based on discoveries from the due diligence phase.
- Along the way the Buyer has to secure financing and the Seller arranges to pay off liabilities.
Then comes the real work for the Buyer, taking over and making the deal work. Along the way both Seller and Buyer will benefit from a team of experienced advisors who help vet, negotiate and document the deal.
One major caution.
Many Sellers over-value their companies and many Buyers pay too much and then get themselves into trouble. Getting an accurate valuation from a firm that does valuations and doesn’t have a stake in the deal is essential for first time Buyers. Even experienced Buyers use valuations to help keep themselves sane and focused as they negotiate price and terms.
Most deals are based on cash flow: What will it cost to buy the company? Can yearly net income cover the acquisition cost and yield a profit? Every Buyer should keep a close eye on that equation throughout due diligence and as the final offer gets crafted.
Use the due diligence phase to evaluate the quality of assets.
How strong / valuable are your: customer lists; vendor relationships; work on hand; processes for doing the work; employees who are trained and committed?
What’s the likelihood that employees might leave and take customers with them? Will vendors honor agreements going forward? Will customers stick around? Are assets encumbered with loans or liens, and will the Seller be able to pay those off? Will employees stay on? Are inventory and work on hand accurate? Will knowledge be lost if employees leave? It’s Buyer beware in this phase.
Be careful not to rely too heavily on Sellers involvement post-deal. There’s a reason why they’re selling, and often it’s so they can get on with a new life. If they stay, commitment changes as they switch from owners to employees.
Be aware of human nature.
The more effort Buyers put into vetting the deal, the more they want to make the deal happen. That’s a mistake. The only good deal is one that has significant potential to yield a positive return short and long term. Watch out if surprises keep showing up. You want to do business with a trustworthy Seller. There will always be other good deals out there to pursue if this one doesn’t seem right. Keep in mind that more deals fall apart than get through closing. As a Buyer, keep your options open by keeping an eye out for alternative deals to pursue.
Looking for a good book?
Try “Mergers and Acquisitions from A to Z“, by Andrew J. Sherman.