Executing your acquisition strategy: Tips on shoring up the chance of success
For mergers and acquisitions (M&A) involving mid-market privately owned businesses, the competitive seller’s market has blurred the lines between strategic buyers and financial buyers requiring a differentiated approach to the deal process to successfully close a transaction.
A clear distinction between financial buyers–Private Equity– and strategic buyers has always been in the willingness of strategic buyers to pay a higher price for acquisitions based on valuations backed by synergies, but we’re seeing financial buyers coming to the table with more valuations near or on par with strategic buyers. Financial buyers, motivated by investor pressure to deploy capital and encouraged by a liquid lending environment are becoming increasingly aggressive in paying premiums to secure acquisitions, particularly when acquisitions are viewed as a platform with potential for synergies on subsequent add-on acquisitions.
From a strategic buyer’s perspective, this change in trends has compromised the ability to sit-back and wait for the right opportunities. The entry of financial buyers can unexpectedly disrupt an industry and threaten market relationships across the supply chain or across the customer base. Strategic buyers need to proactively develop acquisition strategies based not only on opportunities for continued growth but also in consideration for the acquisition strategies of other market participants and the core relationships that drive the existing business.
In execution of an acquisition strategy, we’ve found the following approaches can be successful in shoring up the chance of success:
- Clearly articulate the acquisition strategy and post-transaction plan for employees and the continued growth of the business
- Define your deal criteria before you start looking to help you evaluate opportunities and to help protect against over-paying for targets and to keep focus on your strategic objectives.
- Pre-arrange your transaction financing to improve deal certainty and avoid a competitive disadvantage
- Bring in the A-team. Bring the right leaders and a core deal team–including your key advisors-to the table early in the process to reinforce your commitment to a clear and efficient process.
- Engage in pre-Letter of Intent (LOI) due diligence to confirm deal fundamentals and post-transaction risks and opportunities and ensure alignment with deal criteria. It is worth noting that a seller may be more responsive to sharing sensitive information with professional advisors than directly with the corporate teams of the strategic buyer.
- Ensure alignment on key deal terms and definitions early in the process and incorporate key terms into the Letter of Intent – particularly with respect to purchase price calculations and adjustment mechanism, working capital definitions and post-transaction expectations of seller engagement and compensation.
- Consider creative deal structures using earn-outs or performance based contingent considerations to bridge the gap in valuation expectations between buyers and sellers and encourage post-transaction commitment to success by all parties.
Overall, the key to driving the success of a transaction, is managing the dynamics of the relationship between buyer and seller with a professional and clear communication strategy – and of course, coming to the right deal terms.