In the first installment of our Mergers & Acquisitions (M&A) Considerations series, we discussed internal preparations directly within a company’s control that can contribute to an efficient and effective M&A deal process. In this second and final installment, we will explore steps management can take outside of the firm to cultivate interest and preparedness.
It’s probably been a while since you last spent significant time surveying the competitive landscape of your industry, and it is very likely that you have not done that analysis through the lens of an acquisition. Of all the preparations listed, this is the most useful exercise generally applicable to other areas of your business. Examine your direct and indirect competition. Sketch an outline of those companies’ strengths, weaknesses, opportunities, and threats (SWOT) – along with your own. Look for synergistic alignment between your company and others you have identified who are well positioned. Identify and profile strategic buyers to whom you can make a strong case as an attractive acquisition target that would improve their competitive advantage.
Identify and profile strategic buyers to whom you can make a strong case as an attractive acquisition target that would improve their competitive advantage.
In addition to industry players, you should also take a look at financial buyers with expertise in your industry. These are typically private equity firms that evaluate and acquire companies where they can add value to their portfolio or leverage their scaling expertise. Look for themes in your analysis and expand into alternative options. When you have a target list, identify your preferences and prioritize which companies might be the best options to approach.
It will come as little surprise that many M&A deals tend to come through degrees of existing relationships. In fact, many acquisitions start off as partnerships, where both parties then have the opportunity to do a longer, unofficial form of due diligence. Talk to your investors and board of directors about possible partnerships with profiled companies that have the potential to become strategic buyers. If you have already aligned with your board that an acquisition is the best move, work on engaging in more explicit conversations with those potential buyers. Leverage traditional networking options as well – such as conferences, investor meets, peer groups, industry socials, etc. to help generate warm introductions. Prepare a confidential memo or teaser deck that you can share when appropriate which highlights the relevant aspects of why your business is a great acquisition target (growth, metrics, product, team, traction, etc).
Before you network to make contact, try to increase the general awareness of your company.
As a related aside, it is worth noting that being visible as a company is helpful when it comes to networking around an acquisition. Before you network to make contact, try to increase the general awareness of your company. Standard options like speaking engagements, press releases, investor updates, published articles, etc. can be a big help in generating brand recognition and favorable content. The company profile generated by these activities can help create a good first impression before a potential buyer even starts proper research.
M&A transactions are complicated business deals with high stakes. Deals can (and do) get done between founders and/or executives directly, but having the right expertise in the room from the start is a significant value add. In order of most critical, you should leverage the valuable expertise of lawyers, CFOs, and investment bankers in your deal. In particular, the legal documents and advice required to close an M&A deal are enough of a specialty that you should consider hiring a firm with acquisition expertise. You will want your legal team to help navigate contract terms, identify significant deal risk, and offer practical legal solutions to any issues that arise. Having a CFO involved to drive the financial operations of a deal with multiple parties is also prudent. Your CFO can manage internal and external teams through deal close and cover deal activities such as financial statement preparation, due diligence, and buyer requests. A CFO can also provide business perspective on critical deal terms in negotiation.
Your CFO can manage internal and external teams through deal close and cover deal activities such as financial statement preparation, due diligence, and buyer requests.
Adding investment bankers to a deal can also be useful. With the frequency of acquisitions an M&A team manages, you can rely on them to have quality research, a strong network of potential buyers, significant process experience, and good information on market timing and pricing.
Last but certainly not least is direct negotiations – the coveted stage that every potential seller aspires to get to. Well before you reach this point, however, it would be wise to consider what your best alternative to a negotiated agreement (BATNA) is – i.e., the best alternative you have if a mutually acceptable negotiated agreement cannot be made. This is not to be confused with your reservation value, by the way, which is the worst negotiated deal that you would be willing to accept. Some potential BATNAs, for example, include an alternative acquisition offer, a bridge round of financing, a down round fundraise, or even refocusing efforts back on running your business.
It is prudent to stress test your baseline terms and bottom line number before you find yourself in the middle of a live negotiation.
Identifying your reservation value is key in negotiations as well. M&A deals are often emotionally charged, which can skew rationality and objectivity. It is prudent to stress test your baseline terms and bottom line number before you find yourself in the middle of a live negotiation. Once you are in some form of negotiation over a letter of intent or over a contract (if you have progressed to a much later stage) the main focus should be on negotiating terms. There are too many factors to list and review in this piece, but here are a few key considerations: price, working capital, employee/founder retention, disclosures, representation and warranties, escrow, termination, and binding rights. Your team of experts should have a view on these items from a legal and business perspective.
This concludes our brief but broad two-part series on M&A Considerations. To be clear, this is a survey, and there are many nuances that we have only just highlighted. However, if you are considering an acquisition as a possible exit strategy or growth opportunity, this series should give you a good starting framework of how to prepare for a sell-side acquisition from an internal and external perspective. Best of luck.