Buy-Side M&A Searches – Nine Steps to Best Practice
With the recent acceleration of globalisation and aggregation of businesses the volume of M&A prospecting has considerably grown. In the last four years alone, the Johnson team has researched over 2,000 targets, and we have engaged with the owners of at least 250 businesses, and advised on dozens of acquisitions or mergers.
Searching for acquisition targets is part process, part experience and part intuition. Your advisor should have expertise and experience in all three of these critical areas otherwise you will be missing out. Our experience has revealed these nine critical steps to concluding a quality M&A transaction.
1. FIT WITH STRATEGY
Confirm how the buy-side search sits within your business strategy. Define what you are seeking in the context of your strategy and business plan. What are you seeking to achieve from this acquisition, and when do you want to achieve it? If you are looking at multiple acquisitions, how will they be prioritised?
2. FIT WITH CULTURE AND STRUCTURE
What is the value-set of your organisation and how is this manifest in behaviour and the modus operandi of your business? Understand this deeply so you can define what will fit and what will not. What does your business stand for (internal recognition) and what is your business known for (external recognition) – these are the non-negotiable elements that must be matched by any acquisition.
3. DEFINE ATTRIBUTES
Define the attributes that you are seeking from an acquisition, for example new or additional skills, new client relationships, additional leadership, new geographies, access to new markets, size and scale. Be granular with these attributes and how they will fit with your business. It is important to remain pragmatic and realistic when determining these attributes.
4. LIVE TEST
Identify the perfect target and test your fit and attribute characteristics, what does this test tell you about what you are looking for? Do you need to rethink what you are seeking? It may also help understand the pool of targets and how wide or narrow the net will need to be cast.
Some clients have an existing target list, some don’t. The advisor will start the formal search process using their intimate knowledge of the market and its participants. The resulting longlist should include some wild cards that push out into adjacencies and test your thinking. Discussing and culling the longlist with the advisor is an integral part of the process, which should challenge the acquirer and be a valuable use of time. It should assist in understanding choices and priorities.
6. CONTACT SHORTLISTED TARGETS
The advisor will approach and ideally meet the CEOs of the shortlisted targets – the initial meeting is usually without disclosing the acquirer’s identity. I’ve not known many target CEOs who are not interested in at least one dialogue. Many will share a lot of information. One of the first questions to ask is “why would you sell”, and “why would you work in a larger organisation and report to a new boss?” A skilled advisor will quickly determine if there is going to be a fit – based on facts, experience and intuition.
7. PRIORITISING THE CHOICES
A well-run buy-side search will provide the acquirer with choice. The skilled advisor will then work with the client to establish a formal and rational process of selection, relative to the initial criteria and the pre-qualified targets. As a go-between the advisor can keep the pre-qualified targets ‘warm’ and be available to coach the targets through the process, which is often subject to delay due to external factors.
8. DO YOU LIKE EACH OTHER?
That first meeting of buyer and seller is all-important. The buyer should trust his or her intuition, great CEOs have great judgement and long before due diligence is commenced that judgement must be deployed. If it smells wrong, it will rot. An experienced advisor will understand this and ensure that you the client, do not waste your time unnecessarily on a poor fit.
9. KEEPING IT TRUE
If both parties (the buyer and seller) agree there is a fit, then the detailed work to close the transaction will commence. First agree an ‘in principle’ price and the terms, this will require high level reviews of the financial information and management reports. If agreed, then move to detailed due diligence and legal documentation. The advisor should ride shotgun through this process to keep it true to what was agreed, too many transactions fail because the process gets bogged down or drifts from what was originally intended by the principals. The seller can get frustrated and walk.
As more firms and companies seek to grow by quantum leaps through acquisition, the search process to ‘net’ the right acquisition becomes ever more critical. Considerable time, with commensurate opportunity cost, can be wasted if the process is poorly managed. But more than this, clients today are seeking an advisor who not only can run a process, but more valuably, provides insights into which acquisitions will be successful – and why.