Executive Tools
- Executive Summary
- Self Assessment Checklist
Expert Practices Articles
- Is an Acquisition Right for You?
- How to Do Successful Acquisitions
- Finding the Right Acquisition Candidate
- Due Diligence: Checking Out the Deal
- Determining Value
- Negotiating the Deal
- Managing Transition: Seeing the Deal Through
- Avoiding the Deal Killers
Case Histories
- Use a "Possible Alliance" Letter to Contact Potential
Acquisition Candidates
Tools & Analysis
- Environmental, Health and Safety Due Diligence
- Financial Due Diligence Checklist
- Legal Due Diligence Checklist
- Sales, Marketing and Operations Due Diligence Checklist
- Checklist: Are They Intrapreneurial?
Book List: Mergers & Acquisitions
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CEO Best Practice: Mergers & Acquisitions
Executive Summary
- Is an Acquisition Right for You?
- How to Do Successful Acquisitions
- Finding the Right Acquisition Candidate
- Due Diligence: Checking Out the Deal
- Determining Value
- Negotiating the Deal
- Managing Transition: Seeing the Deal Through
- Avoiding the Deal Killers
Is an Acquisition Right for You?
These days, it seems, everybody wants to make a deal. Mergers,
acquisitions and rollups are taking place at a record clip. But
just because deals seem to be going down on every corner does not
mean that everyone should pursue an acquisition. According to Vistage
speakers and M&A experts Terry Gambill and Bill Hodge, acquisitions
carry a high degree of risk. When properly planned and implemented,
acquisitions offer a legitimate growth strategy for companies of
all sizes. But when they fail, they generally fail big-time.
According to Gambill and Hodge, there are many legitimate reasons
for acquiring another company. These include:
- Expanding your markets
- Acquiring people, systems or processes
- Acquiring new products, services or customers
- Achieving economies of scale
- Reducing expenses
- Creating opportunities for cross-selling
- Acquiring new distribution systems
- Eliminating competition
Ultimately, however, all legitimate reasons for contemplating an
acquisition fall under one all-encompassing umbrella -- the desire
or need for quick and substantial growth.
"When you get down to it, the only real reason to acquire
a company is to create significant growth," states Gambill.
"If you want to grow incrementally, don't bother with an acquisition."
To tell if an acquisition makes sense for your business, ask three
simple questions:
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How to Do Successful Acquisitions
To ensure a successful acquisition, say Gambill and Hodge, get
your strategy right first. Formulating an acquisition strategy requires
four basic steps:
- Identify your goals.
- Consider other alternatives.
- Establish key parameters for the deal.
- Create a one-page acquisition criteria sheet.
Once you have completed these steps, you're ready to start looking
for a company to acquire. Before diving head-first into an acquisition,
however, make sure you have the right foundation in place in your
own business. This includes:
- Computer and information management systems
- Management teams
- Financial planning and reporting
- Human resources
According to Hodge, potential buyers should answer four sets of
strategic questions before making an acquisition:
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Finding the Right Acquisition Candidate
To guide your search for qualified candidates, Gambill recommends
developing a one-page "acquisition criteria sheet" that
outlines:
- Who you are, what you do and where you do it
- Your company's core competencies
- How you are financed
- What you're looking for, including:
- Type of business
- Size of the business
- Where it could or should be located
- Whether you want to buy all or part of the business
- Whether you want people, places or things, or stand-alone business
units
- Examples of what the deal could look like (if you have already
done similar deals)
- The contact person at your company
Keep your criteria short and to the point. If you can't fit the
information onto one sheet of paper, you haven't defined your criteria
clearly enough.
With acquisition criteria sheet in hand, you can now start looking
for companies to acquire. Acquisition candidates can turn up in
many different places, including:
- Related companies
- Customers or distributors
- Vendors
- Trade shows and industry association groups
- Salespeople
- The Internet
Once a candidate meets your initial deal criteria, the next step
involves assessing the potential synergies in the deal. Hodge states
that synergies come in two categories -- performance breakthroughs
and revenue enhancements. Without synergy in at least one of these
areas, the deal will likely fall flat on its face.
In addition to assessing the potential synergy, ask the following
questions:
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Due Diligence: Checking Out the Deal
According to Hodge, anyone acquiring another business should do
in-depth due diligence in three critical areas: marketing, financial
and legal (which includes environmental concerns). Marketing due
diligence involves taking a hard look at your assumptions regarding
the company's future revenue growth and profitability assumptions,
as well as assessing the market's key leverage points and how those
might be changing. Financial and legal due diligence can be covered
by examining four key areas -- assets, liabilities, cash flow and
revenue and growth rate.
In addition to these areas, Gambill points out a fourth equally
important area -- cultural due diligence. This requires researching
how the organization is run, how management reviews, evaluates and
rewards employees, and how management sets performance expectations.
To conclude the due diligence process, Gambill recommends creating
financial projections using different scenarios. To "pro forma"
the deal:
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Determining Value
According to Hodge, the value of a business is a reflection of
four key elements -- assets, technology, cash flow and synergy.
Together, the first three represent the "stand-alone value"
(SAV) of the business, which equals the value a professional valuator
will place on the seller's business. Business valuators do not include
synergy in their calculations of the seller's value; synergy can
only be calculated by the buyer.
The "buyer's economic value" (BEV) establishes the maximum
price you can pay and still have a successful deal. To determine
BEV, subtract the pre-acquisition SAV value of your business from
the value of the combined companies on a post-acquisition basis.
Your BEV represents the high end of the price negotiating range.
The SAV of the seller-candidate sets the minimum price the seller
will ask (a rational seller will not sell his company below his
SAV.) The final price agreed to during negotiations will fall somewhere
in between the SAV of the seller-candidate and the BEV.
To avoid losing value in the deal, keep a close eye on the premium
-- the amount you pay above SAV. When calculating value, suggests
Hodge, keep the following in mind:
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Negotiating the Deal
To get the best deal, says Gambill, let the seller set the price
as long as you get to set the terms. In many cases, creative use
of terms will allow you to meet the seller's price without paying
more than you want.
For example, suppose a business owner wants $2 million for his
company but you value it at $1 million. By structuring the deal
as $100,000 down, $400,000 in five one-year, no-interest notes,
and $1.5 million as five percent of sales, the owner gets his asking
price, while you will pay only slightly more than $1 million (based
on present net value of the five-year payments). Equally as important,
you get the seller to share the risk. If the business goes into
the tank over the next five years, you only pay five percent of
whatever the business ends up being worth.
When negotiating terms, says Gambill:
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Managing Transition: Seeing the Deal Through
Every acquisition has a "hard" and a "soft"
side. The hard side represents the numbers -- the cash flows, revenue
streams, cost savings, valuation, price and terms. The soft side
represents the people side of the equation. While most CEOs focus
the majority of their time and attention on the numbers, the people
issues often make or break a deal.
The CEO of the acquiring company needs to take a very active, hands-on
role during the transition period. In particular, he or she must:
- Set crystal-clear performance expectations
- Communicate those expectations to all levels of both organizations
- Lay out what the transition will look like
- Address the WIIFM (what's in it for me?) factor
"Acquisition creates change, especially for people in the
company being acquired," explains Gambill. "And as we
all know, people tend to resist change. Unless you address their
issues in a forthright manner, the transition effort can quickly
grind to a halt."
According to Hodge, a good transition plan addresses the following
areas:
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Avoiding the Deal-Killers
According to Gambill and Hodge, only about one out every three
acquisitions actually achieve their stated pre-merger goals. They
identify the following as some of the most common (and lethal) culprits:
- Bad strategy
- Failure to properly analyze the deal synergies
- Bad chemistry and cultural conflicts
- Unrealistic expectations
- Failure to consider the potential impact on your core business
- Lack of or poorly implemented transition plan
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