Among the fastest ways for a company to grow entity value is through accretive acquisitions. With a well-executed acquisition strategy, companies can realize significant value in the first year, which often accelerates in the years that follow.
Many industries are highly fragmented, and consolidation is a smart and prudent strategy for growth. Even in consolidated sectors, targeted acquisitions can be fruitful. In both circumstances, spending the time to develop an acquisition strategy with well-thought-out criteria defining successful acquisition targets is vital. Remain true to your strategy by referring to the goals of the transaction throughout the process.
Factors in Achieving Successful M&A Transactions
According to a recent study performed by Deloitte, focusing on certain factors of the deal process leads to higher success rates. Below, we provide more detail on each of the six factors to ensure a positive outcome for businesses seeking to expand through acquisitions.
Sound Due Diligence Process
A sound due diligence process wins the day in any M&A transaction. It is essential for the acquirer to examine the target business carefully. For example, look at the management team and decide whether they have the depth and talent you require. Review the operating structure and systems to ascertain the quality of their data and whether you will need to make significant investments to bring the company up to acceptable standards. Determine whether the target company has competitive barriers, i.e., does the company have a protected position in the market? Customer concentration is another area to assess, especially if the target has customers that represent more than 10% of its revenue. And finally, look at how the target business compares to its competitors in the same industry. Understanding these issues and setting acceptable thresholds to measure each target will ensure you remain true to the goals of the transaction.
Proper Target Identification
Determine the specific criteria for acquisition targets. Once these criteria are established, use them to develop proprietary deal flow. These are the transactions that you find through a proactive marketing effort rather than from only responding to transactions presented to you. Many acquirers do not take the time to develop proprietary deal flow; however, a dedicated effort can help guide your acquisition strategy and avoid auctions, which often lead to higher valuations.
Stable Regulatory and Legislative Environment
In some instances, understanding how the government could affect potential acquisitions is critical. You should research pending legislative bills that will impact the target industry. One good place to begin is the trade associations. It is important to remember that values are impacted by new regulations and laws that create risk. A stable legal and regulatory environment is essential for any acquisition target.
Accurately Valuing a Target
Many companies overpay for acquisitions in a frenzy of excitement during the negotiation. The need to stay disciplined cannot be overstated. Remain focused on the acquisition strategy, and realistic about the target’s impact. Diligent financial analysis of the expected return on investment and cash payback is required. Take time during the negotiations to review your assumptions.
Of equal concern is debt. Taking on too much bank debt can be disastrous. Understanding how much capital to put into a deal and having strong, trustworthy relationships with lenders are paramount to avoiding this situation. Performing detailed financial modeling will help mitigate potential failures.
When the economy is strong and confidence is high the value extracted from a potential acquisition will increase. If the economy appears to waver, it might be time to rethink how to move forward. Potential economic headwinds could negatively impact the acquisition’s financial performance, lowering profits and the potential return. The acquirer should feel comfortable with the economy and the target’s ability to weather any economic downturn.
The financial projections might make perfect sense, but they will not be meaningful without a solid integration plan. Clearly define the goals and risks of the deal and set integration priorities accordingly. Realistic planning is critical to success, and without this, the expected synergies could be lost. You should have a plan in place with set milestones so that the acquisition integration can be measured, with corrections made as needed. The integration teams should consist of key people from each of the key business groups, including sales, marketing, operations, finance and accounting, human resources, legal, and IT. These people are critical to the evaluation and integration of an acquisition target.
An Additional Factor - Create a Deal Team
To have the greatest chance for success, develop a deal team to help you assess the issues described above. Your deal team is critical to ensure the deal is properly vetted and structured. Key components of this group include an investment bank, an accounting firm, and a law firm. The investment bank will quarterback the process and help with valuation, due diligence, negotiations, and prospecting for targets. The accountant will thoroughly review the financials to make sure the numbers are real. The law firm works to structure the agreements and protect the acquirer if something goes wrong.
There is a wide range of issues for any company when considering acquisitions. A well-thought-out business strategy and well-designed integration plan will create the highest probability of success. Always remember, if the deal does not accomplish the goals you originally set out to achieve, walking away might be the best solution.
PCE has guided numerous companies through acquisition planning and execution. Please contact us so we can tell you more about our services or answer questions you may have.