Investment Banking Blog Series – Buy Side M&A Process (Article 1 of 4)

Key Steps in Acquiring A Business

By: RKJ Partners, LLC (Cyril Jones & Gregory Ficklin)

As investment bankers, RKJ Partners, LLC possesses a breadth of knowledge and experience in advising buyers on business acquisitions.  In our latest blog installment, we outline the eight basic steps involved in the buy side M&A process and related insights to assist in a successful execution.

The steps in acquiring a business are far from easy.  However, advanced planning can significantly increase the likelihood of a successful transaction. Even in a booming economy, planning and implementation of a business acquisition will invariably place significant pressure on a potential buyer and one’s organizational resources. The following are fundamental steps for a potential buyer and his deal team in the buy-side M&A process:

1. Define Acquisition Criteria. Prior to initiating the buy-side M&A process, it is crucial for a potential buyer to set the criteria for the business acquisition. For example, the acquisition criteria may include: geographical restrictions, industry/market niches, sales size, profitability, stage (start-up, growing, mature) and business format (independent/standalone, franchise). Of course, the amount of available capital to invest and the buyer’s personal financial strength are also important considerations.  The acquisition criteria may be revised multiple times as the buyer progresses through the process.

2. Generate Acquisition Candidates and Targets. Armed with defined acquisition criteria, the buyer is tasked with identifying and approaching businesses that fit the desired profile. This step can be the most difficult because there is no all-inclusive list of businesses for sale comparable to the residential real estate industry. More importantly, most business owners wishing to sell their business tend not to tell anyone except their closest advisors (attorneys, accountants, investment bankers).  Potential buyers often engage the services of an investment banker who is experienced, astute and skilled at efficiently identifying businesses available for sale that match the buyer’s specific acquisition criteria.

3. Conduct Preliminary Review and Pre-Due Diligence. The goal of the preliminary review and pre-due diligence is to identify deal-breaking issues before an excessive commitment of time, resources and expenses are expended. Examples of issues that can immediately cause abandonment of a potential acquisition are: material misstatements of financial statements, employee/personnel issues, customer retention concerns, and pending legal litigation/potential lawsuits. A buyer should have a reasonable level of comfort that the potential acquisition candidates fit the criteria and have a reasonable chance of being successfully acquired.

4. Establish Preliminary Valuation. The buyer should establish an initial view of what they believe the potential business acquisition is worth.  Early in the M&A process, the view of valuation is preliminary and often heavily contingent on the financial information provided by the seller.  Sellers are often hesitant to provide in-depth, detailed financial statements without first feeling comfortable that the buyer can successfully close a transaction.  Similar to the acquisition criteria, a buyer’s view of the valuation may be refined multiple times as additional seller information is provided.

5. Launch Negotiations. Formal negotiations commence with the delivery of a Letter of Intent (LOI) and Purchase Agreement. The LOI outlines the basic terms of the acquisition. The Purchase Agreement outlines specific terms of the acquisition.  The Purchase Agreement is presented in draft form and the final terms are agreed upon after the conclusion of formal due diligence by the buyer.  Attorneys and advisors typically assist in the drafting of both the LOI and Purchase Agreement.

6. Conduct Due-Diligence. Formal due-diligence is a detailed investigation of all issues that need addressing before four simple questions can be answered: Should the buyer make this acquisition? How much should the buyer pay for the business? How should the acquisition be structured? How should the buyer deal with any post-acquisition operating, accounting, and legal issues?  It is critical that the buyer has experienced professionals on the deal team to assist in facilitation of the due-diligence process.

7. Arrange and Secure Financing. Prior to closing, the buyer must provide the seller with evidence that necessary capital and financing exists to complete the transaction.  There are dozens of methods and sources for financing an acquisition (personal savings, bank loans, investors, seller financing). Seller financings have become more common in recent years; according to recent industry data, sellers finance a portion of the acquisition price in about 85% of acquisitions.

8. Close. This step can be as easy as a stroke of a pen, or it can be the most frustrating step as everything deteriorates because the previous seven steps were not executed properly.  The most common mistake is trying to make an acquisition without the proper professional assistance and support.

RKJ Partners, LLC (www.rkjpartners.com): Cyril Jones and Gregory Ficklin are Managing Partners with RKJ Partners, LLC. RKJ is a minority-owned, Atlanta, GA based investment banking firm formed to assist lower middle market growth companies in execute transactions between $2MM and $75MM. Specifically, RKJ provides buy-side and sell side M&A advisory services, capital raising services and strategic advisory services.