Ian Dawson of Seneca Partners explains the steps to take to acquire a successful business and the elements you must consider.
We are pleased to present the fifth piece of the Build Back to Better. In the previous instalment, Ian Dawson, corporate finance director at Seneca Partners, gave tips on what to search for when selling your company. In this article, he outlines certain vital aspects when purchasing a company.
Strategic acquisitions can boost growth by introducing new markets, customers, or skills and services. If it is done right, it can assist you in reaching your goals more quickly than an organic growth approach.
However, acquisitions can be complex and require multiple workstreams, and if not handled correctly, they can devalue shareholder value rather than generate it. There are several key factors to be aware of to ensure that your acquisition achieves your goals and ultimately improves shareholders’ value.
Process
The acquisition process is complicated with multiple phases and workstreams like formulating strategy and defining guidelines, identifying, evaluating and pursuing targets, financing and deal structuring, tax due diligence and legal negotiations, and implementing and realising synergies.
First, you must establish the acquisition plan and the criteria. It would help if you considered whether you’d like to participate in auctions with a competitive element or are looking for deals that are off the market or bilateral. In some cases, there may be a particular goal you wish to purchase that is strategic. However, most of the time, the best method is to narrow down and make contact with multiple targets simultaneously to increase the chances of concluding a deal with just only one target is very low.
The targets must be contacted to evaluate them on a higher level, and bids must be indicatively submitted. If you’re successful, you’ll be given exclusivity to conduct thorough due diligence, analyze synergies and verify the value-creation story. If all goes well, it’s a done deal, and you’re now able to begin the integration phase and, after the agreement, deliver synergies. If you are required to raise capital from outside sources to finance the process as mentioned above in the future, it will undoubtedly complicate and delay the deal, which is why it is essential to discuss with funders early on. Is recommended.
Strategies and criteria
The first step is to consider whether buying a business is the best option or if your goals can be met faster through organic growth or by forming collaboration or an alliance. Acquisitions can bring significant value if they are carefully planned and executed. Still, acquisitions can prove expensive, particularly if caught in a competitive auction and you end up overpaying.
Many first-time buyers underestimate the amount of time and energy required initially to go through the formal acquisition process later for a successful integration of two companies to realize the synergies theoretically and create shareholder value.
If acquisitions are the best strategy for you, then decide (and follow) your criteria. Are you looking for targets that are stressed or prime targets? What size and location, capability or propensity to market? Explore the market and rank targets according to your primary factors. One important thing to remember when considering targets is how the culture of a target is different from your personal culture. This is often challenging to analyze from an external viewpoint, but it can be crucial for an effective integration process for the targeted over the long term.
Valuation
It’s not enough to select the right business but to buy the right company at a reasonable cost. Even if your target is an excellent strategic fit, it isn’t easy to make the gains needed to make the purchase profitable if you pay more than that. One of the main drivers of returns of acquisition is often the synergies realized with careful consideration of post-deal synergies that could lead to acquisitions that create substantial shareholder value.
However, many synergies are generated in different ways. The ones resulting from cost savings are generally easier to recognize and implement, but more is needed to generate long-term shareholder value through cost savings alone. Therefore, consider possible revenue synergies that could create substantial shareholder value over time.
When looking at synergies, it is crucial to consider the benefits they offer, the risk or chance they’ll be realized, the timeframe to realize them and if there are expenses for implementation required to realize the benefits. Keep in mind that, in reality, it is often longer to realize synergies than it is theoretically feasible. To determine the benefits of synergies and compare and value both companies on a stand-alone basis, as well as the impact of the synergies identified by using combined modelling.
After synergies have been identified and analyzed, think about what the value of synergies should be divided between buyers and sellers. If synergy is available to any buyer and seller, the seller will have the advantage when negotiating a better price with potential buyers. However, when you are a buyer and the only one to realize a specific synergy, you should consider keeping the majority or all advantages. An early analysis of synergies and continuous evaluation throughout the process and tracking their development after the sale will ensure you have the most excellent chance of your purchase maximizing value.
Structure and funding
There are many ways of financing and structuring an acquisition, and an external market for funding is available for carefully-planned strategies for acquisition. Explore all the options available to you from outside, like the many equities and debt lenders, as well as the possibility of using internal resources, such as issuing shares or in the form of deferred consideration that is in the form in the form of loan note, cash deferred, or earn-outs.
When assessing the funding capacity, funds will consider the total financials EBITDA (earnings before taxes, interest depreciation and amortization) along with a fair assessment of synergies with the total security position. It is crucial to know how funders evaluate the financing of acquisitions on a case-by-case basis or offer a war chest that you can use to hunt for acquisitions that allow you to carry out the buy-and-build strategy.
Evaluation and diligence
Due diligence is a way to ensure that you’re purchasing the things you think you’re purchasing. Specialist advisors can carry out thorough due diligence, but buyers should be able to identify, comprehend and solve the major issues early on. Based on the diligence results, the issues could be addressed through a price reduction, change in the structure of the deal and legal protections such as indemnities, or by rectifying the deal within the 100-day timeframe. Suppose you cannot effectively address a significant issue using any of the above options. In that case, it is best to walk out, even though it can be problematic in the real world, particularly if you’re overwhelmed by the excitement of an auction.
Synergies and integration
You’ve come to the point of completion, which means the transaction is completed. It’s been a challenging task to get here. However, it would help if you did not relax, as effective integration and realising synergies will determine whether the acquisition is successful and adds value. The ultimate goal of the acquisition is to boost shareholder value, and, ultimately, this is measured by the earnings accretion process or the share’s earnings. A preliminary, high-level analysis of when and if the acquisition is earning accretive could aid in understanding the value-creation potential of the acquisition.
Conclusion
Keep in mind that high-quality companies will attract plenty of attention from trade acquisitions and private equity firms. Therefore buyers must focus on making themselves the ideal place to locate the company they want to buy. Don’t underestimate the time, effort, and effort required to execute a successful acquisition. Keep reviewing your strategic reasoning during your acquisition. It would help if you were prepared to revisit your perspective regarding value creation as you discover more about the goal. But, if you do it correctly, an acquisition could be a quick method to meet your goals and create substantial shareholder value in the long term.
