Through the scope of his or her career, an entrepreneur will typically sell a business once or twice, if ever. By contrast, those on the “buy-side” may participate in dozens of transactions. In fact, some make a vocation out of serial acquiring, doing nothing but buying and incorporating businesses to build a portfolio or increase value for a group of shareholders. In my series on mergers and acquisitions (M&A) from the sell-side perspective, I accentuated the importance of strategic planning and preparation at every step along the way. The same holds true for buyers. Whether you are about to embark on your first business acquisition or your 50th, this 6-part guide will give you the tactical guidance and legal foundation you need at the negotiation table to make your next deal your best deal.
Building the Team
Experienced buyers know that successful transactions happen because of the right people. Start by recruiting the essential players, and start early—before you have decided on a business to pursue. You will need an accountant and an attorney, and likely an M&A advisor and an investment banker or other type of financier. The first two parties are necessary for any transaction. Those less experienced in the process should get in touch with M&A consultants; while the inclusion of investors is contingent on your company’s financial budget, forecast, and requirements. This team will help you assess and value various market opportunities or connect you with sellers in their networks you may not have discovered otherwise. Their role is to broaden your field of vision, keep your expectations in check, and prepare you with an idea of how much to spend as well as how long the deal should take. At this point in the process, consider them an ad hoc M&A advisory board. You will also need buy-in from that other board: your management team. Make sure every decision maker within the acquiring organization is informed and excited about the potential deal. Their preliminary approval will ease potential difficulties later on in deliberations.
Scoping the Field
After you have gathered the buying team, the next step is market analysis and prospecting. Although M&A professionals frequently couch their language in battle metaphors, an “us” versus “them” mentality is not productive. In other words, look for allies, not enemies. Hone in on sellers that align with your organization’s philosophy, and on win-win deals that would benefit both you and your target company. Buyers who enter the fray with the objective of mitigating a threat or removing the competition routinely find themselves in negotiation deadlock when the seller senses there’s no mutual reward or respect. You will need to consider a number of factors when assembling your long and short lists of acquisition targets. Think about each candidate’s…
- Industry and position therein: Is the company active in your line of business, an adjacent field, or another sector altogether? What can it add to your organization in terms of capability, technology, intellectual property, customers, partners, and personnel? Companies in certain industries such as health care, communications, education, financial services, and insurance are subject to various state and federal regulations. Plan appropriately and ask your attorney for advice. Together, you can keep track of what information you can find out now as well as the blind spots you will need to investigate during due diligence later on in the transaction.
- Location: Where are the company’s operations located? Where does it do business? Depending on their goals for expansion, some buyers will want to search within their neighborhoods while others should focus on less familiar regions. You may have a clear idea of where to look, or you may discover lucrative opportunities through the course of prospecting and align your objectives—and potentially, your budget—accordingly.
- Size: How big is the target? How complex are its operations? Like location, this can be a major factor in terms of cost analysis. Keep in mind, however, that bigger doesn’t always mean pricier. A startup poised to explode, with a strong brand, and headquartered in the right location can command high valuation. Analysts estimate that Groupon’s recent acquisition of OrderUp, for instance, could have been worth nearly $90 million.
Two other key considerations at the outset of the deal are timing and competition. Think about how long you expect the transaction to last. It takes a long time—between three to six months on average, and as much as 18 months to two years in heavily regulated industries. Meanwhile, keep an eye on potential competing buyers. Who else is in a position to go after the companies on your list? Do not allow your perceptions to pressure you into initiating a deal before you have done your homework. Even the most attractive targets have skeletons, and an accelerated transaction is a boon for the seller who wants to hide liabilities. No business is worth tax debts, organizational inefficiencies, mismanaged intellectual property… the list goes on.
In the next installment of this series, I will begin to delve into the legal substance of preparing to buy a business and offer tips for unearthing the liabilities mentioned above and more. Buyers of all experience levels can benefit from partnership with business transactions attorneys like the ones at Offit Kurman Attorneys at Law. Since 1987, we have been working with clients to achieve their long- and short-term objectives. From pre-transaction planning to closing, we can provide you with the knowledge and confidence to succeed during every stage of the M&A process. To contact me, click here. For more information about Offit Kurman’s business transactions services, click here.
ABOUT MICHAEL N. MERCURIO
Business attorney and M&A lawyer Michael N. Mercurio serves as outside general counsel on matters related to business law, M&A, and real estate law As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on all aspects of business and commerce, with a core specialty in mergers and acquisitions—both from the sell side perspective and buy side perspective. You can also connect with Offit Kurman via Facebook, Twitter, Google+, YouTube, and LinkedIn.
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