An M&A is a terribly long, arduous and risky process. Long and arduous because of the accounting, legal and financial aspects, and risky because though the M&A process might work, it often does not pan out to be beneficial for the company that makes the acquisition.
Here's a seven-phase guide to best navigate your M&A.
In fact, 70-90% of M&A were found to fail, not necessarily because the acquisition didn’t work, but often because the target company was not worth the price, the trouble, or both.
Consequently, though this guide is about going through that process seamlessly, we’re also going to focus on what makes a good acquisition.
Seek Professional Guidance
Engage a team of experienced lawyers, accountants, and financial advisors to ensure a smooth and successful M&A process.
There’s always going to be lawyers involved in any M&A but not necessarily always financial advisors. Engaging a team of professional advisors can greatly enhance the chances of a successful M&A process. Financial advisors can help evaluate the financial aspects of the deal, including the target company's financial condition, future growth prospects, and potential return on investment.
Having a team of experts can help identify potential risks and issues before they become major problems, and provide guidance on how to address them. This can also help ensure that all parties involved in the M&A process, including the buyer, the seller, and the target company, have a clear understanding of their respective obligations and responsibilities.
Additionally, a team of professional advisors can provide support and guidance throughout the entire M&A process, from the initial due diligence phase to post-acquisition integration. This can help minimize the stress and uncertainty that can often accompany a major business transaction.
Consider a Business Acquisition Loan
You might need extra cash to perform the M&A, look into how to secure one effectively.
Define Goals and Objectives
Clearly define the reasons behind the M&A, including the desired outcome and any specific synergies to be achieved.
It’s important to think about the value of the business you acquire, not solely on it’s own, but as an integral part of your operations. No one has the gift of foresight, but thinking synthetically can help.
The main goals of M&As are usually:
- EBITDA Growth
- Acquiring key customer(s)
- Improving your talent pool
- Improving your Intellectual Property
You can acquire key customers through an M&A, but most client contracts have a change of provision clause, and you might not retain every one of them.
You can improve your talent pool, but again, there might be a leakage in the mid to long-term.
As for growth, it does always vary. Are you going to bolster growth effectively? How do you evaluate that?
The most effective approach to evaluating a target is to consider its business model, which consists of four interconnected components that drive value creation and delivery. These components include:
- The customer value proposition, which provides customers with a more efficient, convenient, or cost-effective solution for an important task.
- The profit formula, which outlines the revenue model and cost structure that determine the company's profitability and financial sustainability.
- The resources used to deliver the customer value proposition, such as employees, customers, technology, products, facilities, and funds.
- The processes involved in areas like manufacturing, research and development, budgeting, and sales.
In certain situations, it is possible to extract one of the business model components, resources, from a target company and integrate it into the parent company's model.
This is because resources exist independently of the company, and would still be present even if the firm were to disappear. These types of acquisitions are referred to as "leverage my business model" (LBM) acquisitions.
However, it is not possible to easily transfer other elements of a target company's business model, such as its profit formula and processes, into the parent company's model or vice versa. These elements are unique to the organization and do not persist if the company dissolves.
Instead, a company can purchase another firm's business model and operate it as a separate entity, using it as a platform for significant growth. This type of acquisition is referred to as a "reinvent my business model" (RBM) acquisition. As it turns out, purchasing another company's business model has much greater growth potential than acquiring its resources alone.
Executives often think the revenue margins of the target will automatically reflect once the company is acquired. But that’s rarely the case. You have to make a thorough inspection of the possible synergies possible within the company, and assess what your goals might be.
But, you will exclaim, how can I properly do that without doing due diligence first?
Well, it’s true and it’s not. This ambition check, goals and objectives guideline is always in a process of iteration. You have to apply your Due Diligence findings against the backdrop of your goals and objectives board.
A due diligence process is a thorough review of all financial, operational, and legal aspects of the target company to identify any potential risks and opportunities.
Based on this, you will be able to update your ambition board, and gain leverage to negotiate the deal structure.
Don’t waive off the red flags just because you have an idea of how to fix them once you acquire the company. This is when financial advisors and expert accountants kick in to give you the best insights on how to deal with your findings.
We have a guide on Private Debt DDs, and even though not everything in there applies to the Due Diligence in an M&A process, it still gives you an idea of focal points to keep an eye on.
Negotiate the deal structure
This step is directly informed by the Due Diligence you’ve just performed. It’s the time to reassess whether your ambitions for this acquisition will be met.
Work with legal and financial advisors to negotiate the best deal structure for your company, including the terms and conditions of the sale, financing options, and any contingencies. Here’s some things they can help you with, that will prove beneficial in negotiating the best deal.
- Build scenario models based on your data
- Model the impact on cash flow
- Model the impact on your P&L
- Create an M&A matrix to calculate cash on day one, earn-outs etc…
Plan for integration
It’s crucial to think ahead of the implementation of changes in activities, structures of organisations, and the culture clash between companies, in order to smoothen their effective integration into one another.
Studies have shown that integration is actually one of the deadliest parts of the process to actually get done.
Develop a comprehensive integration plan that considers the cultural and operational differences between the companies, as well as any potential challenges and risks.
There’s three parts to this: The business model, the structure of organisations and the culture fit.
For the business model part, there’s two tested options, the aforementioned LBM and RBM models.
LBM (Leverage My Business Model) Acquisition:
- Efficient use of resources: LBM acquisitions allow the parent company to take advantage of the target company's resources and incorporate them into its own business model. This can lead to cost savings, improved efficiency, and increased profitability.
- Reduced risk: LBM acquisitions are typically less risky than RBM acquisitions because they involve acquiring resources rather than a complete business model. This reduces the risk of integration issues and allows the parent company to focus on the resources that are most critical to its business.
- Limited growth potential: While LBM acquisitions can lead to cost savings and improved efficiency, they do not provide significant growth potential for the parent company.
- Limited scope of integration: LBM acquisitions often only involve integrating specific resources into the parent company's business model. This can limit the scope of the integration and the potential for synergies between the two companies.
RBM (Reinvent My Business Model) Acquisition:
- Significant growth potential: RBM acquisitions provide significant growth potential for the parent company by acquiring another company's complete business model. This allows the parent company to leverage the target company's expertise and experience to drive growth.
- Improved competitive positioning: RBM acquisitions can help the parent company improve its competitive position by acquiring a new business model and the associated capabilities, customers, and markets.
- Integration challenges: RBM acquisitions can be complex and challenging, as the parent company must integrate a complete business model into its own operations. This can result in significant integration risks and potential for failure.
- Increased risk: RBM acquisitions are typically riskier than LBM acquisitions because they involve acquiring a complete business model. This increases the risk of integration issues and the need for significant investments to achieve the desired outcomes.
Continuously review and monitor progress
Regularly review the progress of the integration and make any necessary adjustments to ensure the M&A is a success.