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 2023 alone, almost 15,000 acquisitions were announced, with a total value of nearly $1.5 trillion.

The processes involved, however, can be overwhelming, especially for first-timers. Despite media portrayals of 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 happen 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

Does that sound like a lot? It is. Even small transactions require a significant commitment of time and resources, as the process is the same regardless of whether the purchase price is $100,000 or $100 million. And it all comes at a cost.

While there are many technicalities involved in an acquisition, 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 your level of expertise or experience, you will want to bring on the right advisors. Somewhat obvious examples include legal and accounting teams. Their involvement ensures appropriate transaction documents with appropriately negotiated levels of risk allocation and tax handling.

An M&A intermediary like a business consultant, business broker, or investment banker may also be beneficial. Got questions? The odds are that such an advisor will have answers.

Using good advisors also lessens the management burden. 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 also provides a buffer between you and the seller, keeping emotion from running the show.

The nuts, bolts, and money will also require collaboration with other actors. In addition to helping you with financing, your lender’s due diligence efforts can bolster your own and provide a perhaps more objective perspective on the value of the acquisition. Your benefits and insurance providers will also be helpful in ensuring that the integration of employees and business operations goes smoothly.

That might seem like a crowd. However, each actor playing their role is how you make sure nothing gets missed, and this will allow you to focus on the business itself.

#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 aggression.

Buyers often get tied up with winning every 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. However, that’s not how things usually go and can prove costly to reputation and future cooperation (if necessary).

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 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 buyers and sellers 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 their 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 think the job is done once you’ve signed on the proverbial dotted line. 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, technology, sales, etc. 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 smooth.

#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 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 when you add in upgrades, registration, documentation, insurance, 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).

With only 24 hours 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 ensure the ball isn’t dropped? If things do falter a little, will it impact the transaction?  It’s also important to remember that these ‘new costs’ are incurred on day one. At the same time, the hopeful payoff from the acquisition usually encounters some lag before you see the benefit to the bottom line.

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 much 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 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. Specific 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. However, 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 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 and 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 crucial 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 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 pursuant to an earn-out payment. The terms 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, your ability to keep things in perspective will make or break the deal. Stay careful, thoughtful, and deliberate; you will greatly increase the odds of a successful transaction.

We think you’ll also like:

1. Reading and Writing a Letter of Intent
2. How to Conduct Due Diligence Before Buying a Business
3. How Do I Evaluate Multiple Offers in a Business Sale?

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Selecting the Right Valuation Expert
2. Structuring and Planning the M&A Transaction
3. What Every Founder/Entrepreneur Must Know

This article was originally published on March 6, 2023.]

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