3 Stages and 14 Steps towards a Successful Acquisition
by Derek Smith, Managing Director at Next Stage Solutions, Inc | firstname.lastname@example.org
A properly executed acquisition does not happen overnight! Rather it is process that may take months and even years to accomplish. It begins with management and board agreement to make an acquisition and ends with review of actual results compared with acquisition assumptions. Whether you have acquisitions experience and are planning to acquire additional businesses, or are contemplating a first acquisition for your business, NSS has outlined below 14 steps in three stages you must consider to successfully achieve your goals:
Stage One: The Courting
Acquiring a new business or a business unit can be an effective means to achieve your company’s growth goals. Carefully and thoroughly discuss WHY an acquisitions is the best growth scenario for your business will be time well spent. In fact, 2014 may be an opportune time as there is an uptick predicted on the sell side. The courting game starts here:
1. Agreement of senior management and the board of directors to make an acquisition. Corporate strategic plans will identify that an acquisition is the preferred route for growth rather than investment in organic growth (new products and/or markets). The plan will enumerate the time frame for completing a transaction.
2. Identification of potential acquisition targets. Usually senior management will complete this task.
3. Confirmation that a potential acquiree is willing to discuss being part of a larger organization. Senior management can also undertake this task or they can delegate the responsibility to external advisors if confidentiality is important.
4. Conversations with senior management and the board of directors of the target organization to determine symmetry (products, markets, and personnel), opportunities for synergies, and enterprise value expectations.
5. Development of an Acquisition Paper for approval by the board of directors that identifies (i) reason for acquisition; (ii) valuation of acquiree and expected upside including synergies; (iii) source of funding for the transaction; (iv) management team responsible for all steps of the acquisition process; and (v) risks and distractions arising from acquisition.
Stage Two: The Marriage
Adopting an Acquisition Strategy as outlined above will be very beneficial as you enter the second stage with proper planning, valuation and execution. Most important in this stage is that you have the RIGHT people (internal and external) and use them at the right time. Negotiations between the parties are a critical component of this stage. What happens if the parties cannot agree on Price (regardless of valuations), or other key terms of an agreement. How, who, what, and during which step(s) are these issues resolved by the parties? If you cannot make it happen, always be ready and willing to say “NO” and move on to the next target. Remember, you want to keep risks at a minimum and maximize the value for your business. Here are the Stage Two steps:
6. Execution of a Letter of Intent with target.
7. Accounting and legal due diligence to confirm understandings developed during Step 4. Third party financing of the transaction will require receipt of the due diligence reports before closing on funding.
8. Negotiation of closing documentation including escrow, earn-out, financing and employment agreements if applicable. This is a very challenging stage as it often requires senior management of both organizations to re-negotiate sacred items in order for the transaction to proceed. All parties to this phase need to focus on the business purpose of their tasks.
9. Revisit and verification of the financial model to update for changes arising from the Purchase and Sale Agreement and covenants from financing.
10. Development and approval of post-acquisition plan (integration or stand-alone) including identification of team personnel from both organizations involved in go forward activities.
11. Board of Director approval of closing of the transaction.
12. Closing of purchase.
Stage Three: The Reality Check
The percentage of failed acquisitions is indeed high. We believe that with midmarket companies there is greater flexibility to make change and hence achieve synergies. Critical to your success is that you have developed an integration strategy coupled with identification of the appropriate resources so you are ready for Day 1 after closing. Do not loosen your expectations here and do take the time to take a reality check and learn from the mistakes. The final two steps are:
13. Implementation of post-acquisition plan.
14. 1 Year, 3 Year and 5 Year comparison of actual results against projected results and analysis of variances. Lessons learned are important in ensuring success of future acquisitions.
A successful acquisition requires significant investment of time and energy of CEOs and senior management. Whether you have an Executive Team that is strong and can run the business as you the CEO goes out and hunts for deals (assume 40-60% of your time) or you decide that you MUST run the business and hire external Advisors for assistance, particularly in completing the first or second stages, make that decision very early on. An acquisition can quickly take on a life of its own, drain all your resources, and jeopardize the core business.
Next Stage Solution’s managing directors have been involved in 58 transactions ranging from $1 million to $2.8 billion. They have supported CEOs and other members of management to complete the three stages or any of the 14 steps. Let us help you with your acquisition and make it a SUCCESS!
Call us at 617-449-7728