Deal Execution – Maximising Success in Business Acquisitions
In our previous articles for Incisive Due Diligence (focusing on the business acquisition space) we’ve covered some of the important phases and factors involved in purchasing a business and making it work. Deal execution is the art of bringing all the moving parts together pre-settlement, and that’s what we’ll be looking at today.
Executing a business acquisition is much more than just identifying and agreeing terms with a business, and then signing on the dotted line. It encompasses everything from strategy and planning, asset valuation, analysis and negotiation – right the way through to due diligence and signing the sale contract. Let’s have a look at the major components of effective deal execution and what makes them so important.
As we’ve covered this more comprehensively in “Your Preparation Guide for Acquiring a Business”, we won’t dwell on this point for too long – however it does bear remembering that a comprehensive, well-structured strategy should underpin any acquisition you plan to undertake. Consider things like why you are acquiring the business and what you stand to gain from it; how you plan to finance the acquisition; and how it will impact your bottom line. The strategy for acquiring a business should also align to the overall strategy you have in place for your current business – trying to merge two different strategies into one with different expectations is a recipe for disaster. The fundamental thing to determine is what you want the outcome to be – and work from there.
Search Criteria and Targets
Once an acquisition strategy has been developed, it’s time to determine the search criteria for an ideal target acquisition. These criteria often include industry; location; team culture; tenure in the business; clientele; and public perception (amongst other things). Once criteria have been established, you can move onto identifying acquisition targets. Within professional networks, there may be some businesses who are openly looking to sell, some who may be thinking about it, and some who are not looking to sell at all. When you have identified the targets who meet your criteria, meet with them and determine how receptive they are to the prospect of a merger or acquisition – even if you don’t have any success with a particular target on this occasion, keeping in touch with them over time may open doors for you in the future should their circumstances change.
Valuation, Analysis and Negotiations
Valuing a business is rarely a simple job – especially as an outsider. Your trusted adviser (like the business development team at MP+) is the person to speak with for advice on determining appropriate market valuations, undertaking analysis of an acquisition target, and helping you understand the analysis so you can make an informed decision. By the end of this stage, you should have a good idea of what you think the business is worth – however, the other party may have a different value in mind. Effective negotiation should bridge the gap between what you are willing to pay for the asset and what the seller believes the assets is worth. At this stage, you may find that their thoughts on a reasonable figure are way outside what you had in mind and only through effective negotiation will you be able to progress to the next phase in the process.
Perform Due Diligence (DD)
Arguably the most important step in the process, due diligence aims to identify the key risk areas of the proposed acquisition while undertaking a detailed examination of the target’s operations, financial performance, assets, liabilities, resourcing and capability. In our article The Role of Due Diligence in Your Next Acquisition, we delve into more detail about the different components of a DD, but some key areas include client/customer profile; revenue analysis; competition; margins; and barriers to entry in the relevant industry.
If the DD process fails to turn up any deal-breakers, and the business is in good shape financially and culturally, the decision may be taken to enter into a binding agreement (i.e. sale contract) with the selling party, sign on the dotted line, secure finance (per your acquisition strategy), and proceed to settlement. Of course, that’s a simplified way to look at the end of this process, especially when you consider the importance of integrating your new business, which starts well in advance of settlement and continues far beyond that date (this is especially important to give the acquisition the best chance of falling into the one-third of acquisitions that are successful, as opposed to the two-thirds that are not).
An astute summary of the importance of the deal execution process in a merger or acquisition is as follows: If the merger of two businesses is considered the equivalent of getting married, deal execution is the time between your first date and finally tying the knot. You’ll swipe right on a number of potential candidates and date a handful with whom you have things in common. You’ve met their friends, spent time with their family, and determined which candidate is the best fit for you. Once you propose and they say yes, it’s time to plan the wedding, determine where you are going to live and sign the prenup before ultimately saying the ‘I do’s’. Good deal execution is having the road to the altar mapped out long before you get down on one knee. Sure, there are likely to be some compromises along the way – like how often your mother-in-law should visit, or where you’re spending Christmas each year – but that’s any good marriage.
How MP+ Can Help
McKinley Plowman developed the Incisive DD offering to assist business owners who want to supplement their all-important organic growth with acquisitions. By taking on the difficult and complex financial work in the DD process, Incisive clients can focus on the integration of their new business and markedly increase the likelihood of a successful acquisition. If you’re ready to grow your business in 2021, get in touch with the team via our website or call us on 08 9301 2200 (Joondalup) or 08 9361 3300 (Victoria Park).
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