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.

I never would’ve thought about it this way unless it runs into your blog. Thanks for putting it up. I hope you have great success.
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