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Is now the right time to grow your business by acquiring another company?  Many business owners are asking themselves this question, particularly given the current availability of finance for acquisitions.  Before you jump in and make an acquisition – does the potential acquisition pass the following tests?

1.  Why do you want to buy the business?

In less than a minute, tell me why you want to buy the business.  The ability to succinctly explain the rationale for a complex issue like an acquisition demonstrates an ability to focus on the key success factors.

Companies can make value accretive acquisitions for a number of reasons including; economies of scale, distribution, access to new markets, technology and vertical integration.  Research shows that acquisitions are typically more accretive if they are done for strategic rather than opportunistic or portfolio reasons.

		Existing	New
		Customers	Customers
	Existing Products	A	B		Quadrant A – market share acquisitionsQuadrant B – access to new markets
	New Products	C	D		Quadrant C – product range expansionQuadrant D – are you joking?

2.  What about the most important asset – the people?

Successful buyers try to enlist the early support of the target’s management.  Identify which staff members will continue and in what role.  All employees of the target company will be nervous about their future, change can create fear.  It is imperative to allay those concerns as soon as possible and only make any head count reduction once.  Make sure employees know what is happening to their superannuation and engage them in your vision for and their role in the combined group.

3. Where is your written integration plan?

Ensure that you have a written integration plan with buy in from key staff from both companies.  The plan will cover the integration of products, operations, employees and IT systems.  The success of the integration will usually determine whether the additional revenue and cost savings that drove the acquisition will be realised.

4.  Do you have the bandwidth?

Integration issues are rarely as easy or as quick as you expect.  Does your company have the people, financial operational and system capacity to undertake an acquisition of this size.  Do not endanger you company with an acquisition that you cannot digest.

5. Have you done your homework? – caveat emptor – let the buyer beware

If you have not satisfied yourself with the due diligence undertaken on a potential acquisition, do not pay any goodwill.  If the vendor will not allow sufficient time to undertake proper due diligence, they are probably hiding something.

A letter of intent helps identify key business points and demonstrates to financing sources that the deal is real.  Make sure that it is not a binding commitment to complete the purchase without due diligence and legal agreements to your satisfaction.  However, there should be a commitment by the vendor not to use your offer to shop for a better deal or at least pay you a break fee if they do not proceed.

6.  Do you understand the culture?

Is there a compatible culture between the two businesses?  Just because you operate in the same or similar markets does not mean that culturally the two can co-exist.  This is particularly so in cross border transactions, that may also involve different accounting, taxation, employment and environmental laws.

7.  Have you surrounded yourself with experience?

Does your management team have sufficient mergers and acquisitions, financial and legal skills to undertake an acquisitions of the type contemplated.  If you do, great, if not make sure you engage quality professional advisers.

Endeavour Capital is seeing an increasing demand for our “buy side” corporate advisory services to search an industry for acquisition targets and to assist in evaluating and negotiating an acquisition.  The best deals are often not advertised.  We have acted for numerous clients on the buy side across many industries.

8.  Have you got caught up in the game?

Vendors and their corporate advisers often conduct a tender style sale process that can cause a purchaser to focus on winning the acquisition rather than acquiring in a disciplined way.  A smart purchaser sets their price parameters and terms based on their analysis of the target’s market and prospects and how the businesses will operate as a part of the combined entity.  Frequently the best decision is to decline.

9.  Are you paying too much?

We have deliberately included this towards the end of the list of factors to consider.  Research has shown that, within reason, price is a relatively low issue in determining whether an acquisition makes economic sense – strategic and integration issues are vastly more important.  Having said that, of course you do not want to pay more than you have to, but don’t be too cheap to pay a bit more for quality.  If you can’t agree on price, consider an earn out that gives the vendor extra consideration if the business performs to agreed milestones.

10. Tell me again why you want to buy this business?

At the end of the negotiation, due diligence, legal and financial process, set aside some quiet time to answer the question – why do you consider this to be an attractive acquisition?  Do you believe your answer?

Even for those companies with in house acquisition capabilities, Endeavour Capital is frequently involved as a sounding board of matter such as valuations, structuring and strategic fit.