6 Tips for Successfully Pursuing an Acquisition

One of the primary methods small business owners use to accelerate their growth is acquiring all or part of another company. In 2022 alone, more than 18,000 acquisitions were announced with a total value of $1.92 trillion. 

The processes involved, however, can be overwhelming.  Despite media portrayals depicting acquisitions as a dramatic, sudden plot point, these transactions actually require a lot of work and time. Negotiations, finalizing documentation, and the integration process don’t take place overnight. 

A purchase transaction may best be viewed as unfolding in five phases:

• Discussions and letter of intent
• Due diligence
• Drafting and negotiation
• Closing
• Integration

Sound like a lot? It is. Even small transactions require a significant commitment of time and resources. And it all comes at a cost. 

While the technicalities involved in an acquisition are many, there are six things you should keep in mind if you’re going to succeed (and keep your sanity).

#1 – Good advisors are essential.

No matter what your level of expertise or experience is, you will want to bring on the right advisors. Somewhat obvious examples include a company’s legal and accounting teams. Their involvement ensures appropriate transaction documents and handling of taxes. 

Using an M&A intermediary like a business consultant, business broker, or investment banker may also prove beneficial. Got questions? Odds are such an advisor will have answers. 

It also lessens the burden on management. An advisor can help with everything from structuring the transaction to completing due diligence on the seller and providing a framework for a smooth transaction and subsequent transition. Their presence provides a buffer between you and the seller, too, keeping emotion from running the show.

The nuts, bolts, and money of it all will also require collaboration with other actors. In addition to helping you with financing, your lender’s own due diligence efforts can bolster your own. Your benefits and insurance providers will need to understand what’s coming next to ensure integration goes smoothly. 

That might seem like a crowd. The bigger the parties involved in the transaction, the bigger that crowd gets. But each actor playing their role is how you make sure nothing gets missed.

#2 – You do not need to win every battle to win the war.

As the self-proclaimed Mr. Wonderful (better known as Canadian investor businessman Kevin O’Leary) once said, “Business is war.” When it comes to acquisitions, though, it’s essential to think of that war from the strategic perspective of a general. Winning the war means completing a successful transaction. Losing sight of that makes you more likely to become a casualty of your own aggression. 

Buyers often get tied up with winning every single battle over a negotiation point. You might be able to prevail using that strategy if the seller is in dire straits and has zero leverage in the transaction. That’s not how things usually go. 

In most cases, staying focused on why you’re seeking the transaction is a better approach. This not only helps keep you grounded in purpose but aids in determining which battles really matter. 

Competitive debaters will tell you that picking smart battles boils down to impact calculus. When determining whether or not to budge on a given issue because of a potential consequence, ask yourself these questions:

• What would the magnitude of this impact be?
• How probable is the impact?
• In what timeframe would this impact come to pass?

It is helpful to realize that the buyer and seller often do not view a particular issue as having the same level of importance.  As such, a buyer may get the terms they want on its highest-ranked items by agreeing to seller positions on which they do not feel as strongly.

#3 – Think about integration planning early and often.

Don’t make the mistake of thinking the job is done once you’ve signed on the proverbial dotted line. In fact, the work is often just beginning. After all, what good does owning a new company or set of assets do for you if the new acquisition cannot be utilized to better the whole of your operations?  

To maximize their return on investment, the buyer must successfully integrate the new with the old. This usually involves considering how the impending changes could impact areas like HR, accounting, sales, and more. Juggling these moving pieces takes careful coordination and planning. If you have not been through an integration previously, an M&A consultant may be able to add particular value to the situation. 

Regardless, the questions presented by the integration phase should be asked sooner rather than later. You’ll thank yourself when the transition is a smooth one.

#4 – The total cost of a transaction involves more than just the purchase price.

There’s a reason for having an army of advisors weighing in as you consider the cost of an acquisition. The amount you pay to buy a company is really just the tip of the iceberg.

Think about it like buying a car. Maybe the sticker price looks good. There might even be a sale involved. But by the time you add in upgrades, registration, documentation, and taxes, that sticker price can start to feel like a fairy tale.

Buying a company shares some similarities in that regard. Obviously, you have the purchase price, but you might also be committing immediately to cover compensation for existing executives and staff. You’ll also have attorneys, accountants, and advisors to pay. All those expenses add up before you even contemplate the costs of integration.  

There is also the time and energy spent on the transaction. Though one can argue that our time is priceless, we can make dollar approximations in the business world. Presumably, the buyer comes into the game with the full-time job of running their own business. In my practice, I have had C-level executives and founders tell me on many occasions that going through an M&A process was akin to having a second job (and an unpaid one at that).

With only 24 hours in a day and respect for the fact that none of us are automatons (yet), calculating the cost of an acquisition requires us to consider the tradeoffs made in its pursuit. How will the added work impact your current company’s performance? Can you trust your leadership team to make sure the ball doesn’t get dropped? If things do falter a little, will it impact the transaction?  

Recognizing the rest of these costs is essential before taking in that “new business smell.”

#5 – The structure of a deal can matter just as much as its terms.

It would be a lot easier if acquisitions were as simple as handing the seller a check in exchange for their keys. Unfortunately, that’s rarely the case. Acquisitions can take on various formats, each with its own risk exposure level and circumstances.

It is a mistake to assume that protections like representations, warranties, and indemnities will inherently shield you from the risks involved. Certain transaction structures require a deeper dive. This “dive” usually includes conducting due diligence from a financial, HR, operational, and legal perspective, just to name a few. 

The goal of the dive is to find out everything that can reasonably be known about a company before closing. Even with an experienced team, this review can take significant time and money. But given that some structures can leave the buyer on the hook for almost everything the seller company has ever done, that investment could prove more than worth it.  

It should come as no surprise that most buyers typically favor structures that will inherently minimize risk and require less time to complete. Nevertheless, sometimes circumstances exist that dictate otherwise. You’ll need to weigh the resources required in those circumstances against the value of the transaction to make the choice that best serves you and your company.

#6 – Sometimes transactions don’t close. That’s ok.

Just because you start exploring the purchase of a business does not mean you have to go through with the transaction.  Your decision not to proceed could be for reasons as important as a problematic discovery during due diligence or as simple as the seller being too temperamental during negotiations. To use a poker analogy, you are seldom “pot committed.”

As an example, my firm recently represented a marketing agency that was exploring the purchase of one of a competitor’s divisions. After trading several drafts of the purchase agreement, the seller continued to expand the universe of what she would be paid on pursuant to an earn-out payment. The terms on the table would also have increased my client’s employee-related risks. 

Eventually, my client put forth their last and final offer. The seller continued with negotiation attempts anyway. My client had had enough and terminated the discussions. While adding the division would have been a nice complement to their business, the risks and costs could no longer be justified.

The Bottom Line

Acquisitions can be a great way to quickly scale your company. They also can be complex, costly, and laborious transactions. With the right terms and teams, your chances of success increase substantially. But beyond that, it will be your ability to keep things in perspective that makes or breaks the deal. Stay careful, thoughtful, and deliberate, and the odds will remain ever in your favor.

Looking to learn even more about acquiring a business? You’ll want to check out these on-demand webinars:

• Buying a Business 101

• Roadmap to Growing Your Business by Acquisition

• What’s It Worth? Valuing a Business for Sale

For more information about our on-demand webinar series, click here.

©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.