It seems that every day there is news about a business buying or merging with another one. It makes solid economic sense to take advantage of opportunities that help a business grow or strengthen the position of two businesses that merge. However, not all mergers or acquisitions can, or should, be completed. That’s why it’s crucial that companies understand how and when to move forward with a business acquisition.
If you’re considering purchasing another company or merging, there are specific steps to move through during the process. Failing to ignore basic strategy elements can quickly lead to losses rather than financial gains. Here are just a few of the steps to take for a successful merger or business acquisition.
1. Evaluate Your Motive for the Merger or Business Acquisition
Most people move forward with an acquisition to boost their existing business. That’s a valid reason, but it’s too general in nature. Just how will acquiring another business, or merging with one, benefit your current business?
In some instances, a company is acquired because that company’s research and development or existing patents will move your operation to a new and beneficial level. In other cases, the business acquisition will allow diversification and expansion into new areas. There are numerous benefits possible when merging with or acquiring another operation, but they must also be compatible with your long-term goals.
2. Establish Your Search Criteria
When you’re planning on buying a business in Baltimore MD, take the time early in the process to determine whether a specific opportunity is worth pursuing. A company that looks like a reasonable target on the surface may, in fact, be less than ideal when all factors are considered. It’s not possible to understand that a merger or acquisition is practical until you know all the facts. Make sure you’re basing your search on the correct factors, such as future growth options, location, customer base, and current or future growth potential. Important questions include: How will the business fit into your current business? Will the acquisition target cannibalize your current customer base or add to it? Is this a vertical integration, where you are capturing part of your supply chain?
Remember that this step is not theoretical or unimportant. Without a clear picture of your rationale for the acquisition, it’s far too easy to make costly mistakes. In the vast majority of instances, it pays to discuss your needs and objectives with a business broker and other advisors prior to considering any type of move. Remember the most important question: “Will this business purchase be accretive to my current business?”
3. Start Shopping
Once you’ve determined why you’re looking for a merger or acquisition and understand the criteria to use in that search, it’s time to start shopping. Your business broker is a huge asset here, as he or she will have access to available businesses and make it easier to narrow the available options to a few that should be actively considered. The business broker’s databases will generally include enough information to accomplish those goals. However, that’s only the starting point.
4. Visit All Potential Targets
As a potential purchaser, you or your mergers and acquisitions advisor should now visit all potential businesses to evaluate their current status and make it easier to determine if they are, in fact, suitable candidates for a merger or acquisition.
At this time, meeting with the business owner or management team is appropriate. Doing so provides a better feel for the target business and allows you to see the business in person rather than relying on a few pictures that may or may not reveal the true condition of the business.
While this may or may not include the purchase of the underlying commercial real estate, it does help to notice the condition of the premises. An unsightly physical property status may give clues as to the underlying condition of the business. While it’s never a good idea to make too many immediate changes to a business as a new owner, sloppy conditions could mean that employees are not proud of the business or may be resistant to change as the business is re-organized. This is almost never a good sign for a new owner.
5. Do Your Due Diligence
If the visit and meeting with the owners or management team go well, it’s time to move forward. But, prior to making an offer, obtain and review financial statements and business plans outlining where the prospective acquisition is now and where it’s likely to go in the future.
When applicable, it’s also time to have an expert (or team of experts) inspect the financials, taxes (sales, income, personal property, excise), environmental, building, any equipment, and other real property included in the sale or merger. No one wants expensive issues to pop up after the sale or merger is completed, even if the sale is considered an “asset” sale for tax and legal purposes. It’s always better to understand all possible downsides to the transaction before it’s finalized.
This is another point where the assistance of a business broker can be invaluable. The business broker will be familiar with the industry and the service providers that should be consulted prior to moving forward with a transaction.
6. Make an Offer
If the merger or acquisition still looks promising, it’s time to make an offer. The document that this is done through is called a Letter of Intent or LOI, for short. Business brokers and attorneys will work with you to structure an offer that meets your objectives. There are many elements that might be included in the offer, depending on the business, but all offers contain somewhat similar language. However, each deal and the individual language and the terms involved are unique.
That doesn’t mean you shouldn’t take the time to have other trusted advisors, including your accountant and attorney, review any offer before it’s presented to the Seller. It’s too easy to overlook language that might not meet your objectives or create unanticipated issues later.
7. Be Willing to Negotiate
While your initial offer may be ideal for your needs, it might well conflict with the needs of the Seller. That means a counteroffer should be anticipated. Be realistic when reviewing any counteroffer, and work with your team to evaluate the revised terms to determine if they will work. All mergers and acquisitions will, as a rule, require some back-and-forth negotiating before an agreement is reached. Don’t be put off if it takes time to finalize an agreement.
8. Close the Merger or Acquisition
Even when it appears all issues are worked out, disagreements or minor issues may come up during the closing process. That’s why having a business broker, banker, accountant, and attorney on your team will always pay off. Most problems that arise during the closing process can be dealt with quickly when everyone is on the same page.
During the closing process, it’s important to review all documents to ensure there are none missing and that any errors are addressed. Your business broker and other advisors will be invaluable at this point.
Start Planning Early
It’s always a good idea to take whatever time is needed to ensure the merger or business acquisition proceeds smoothly. That means advance planning will be important. If you’re considering a merger or acquisition anytime in the near future, now is the time to contact a business broker for advice.