Kind of like going out on the first couple of dates in a new relationship, you do not necessarily need the “spark” right away when evaluating acquisitions. When it comes to finding the right match, as they say, “you have to kiss a lot of frogs.” Here’s what to keep in mind when buying a company.
At my former employer, I would initially screen 80-plus companies per year. I would informally evaluate half of that number, visit half of that number, and then do more due diligence on half of that number in hopes of buying two to three companies a year, which we did for about a decade. Most deals completed during that time took at least six months from start to finish (introduction to signing of definitive agreement). Some of the best performing ones took over 12 months as both sides determined whether there was a fit and experienced starts and stops along the way.
If you have a reasonably good meeting, set up another one and avoid rushing into things. Get to know each other, with no games or posturing. It might take months or even longer to determine if there is a good fit or not. As I have said before, some of the best deals I have done were the ones I didn’t do.
When buying a company, do not send an extensive checklist before making an offer. If you need to do that, you should probably re-evaluate whether it is a good fit for your organization.
Instead, send a “short list” that includes:
- A request for current and historical (past three years) P&Ls and balance sheets
- Short-term (one- to three-year) projections without synergies from an acquisition
- Top customer list
- One to two optional items depending on the industry and business mix
Always be willing to offer or to agree to sign a confidentially agreement up front to establish trust. If the intentions are good, then why worry?
Keep it simple.
During this process, valuation discussions will certainly come up. As discussed in previous blogs on planning for acquisition, have a valuation/deal structure criteria and stick to it. This way you can effectively communicate with potential sellers, set the right level of expectations, and of course be consistent.
When ready, make the company an offer consistent with the expectations. If there is a concern from the initial short list, then tell the seller up front before you make the offer. To maintain credibility here, there should be no “major” surprises. For example, do not talk about one number (valuation) and then send something significantly different without any notice or warning. You may never hear back.
I am also not a subscriber to showing them something different to see if they accept it and, if not, then putting the original number back on the table. Companies that are successful in their acquisition strategies have a reputation built on trust and integrity. Be up front and be consistent.
If you are concerned about the seller’s current numbers and run rate, and you are not able to get there on valuation and structure, then simply tell them as soon as possible. At that point it may be best to wait a quarter or two or even longer before moving forward. Again, some of the best deals I had led have taken over six months.
Expect the due diligence process to last around six weeks if both sides have their house in order. If this proves to take more than a few months, then both sides should probably wait until one or both sides get their act together.
This is a very time-consuming and costly process. To make sure it doesn’t drag on or lose focus, have a plan, team, and timetable and set expectations up front. Having a designated point person on the deal internally along with your advisor can help. Your advisor can assist in the diligence process, negotiate definitive agreements, and save you meaningful dollars from a professional fees perspective. Again, it’s important to stay true to your established acquisition strategy.
For more insights on how to take your company to the next level, contact us.
Steve Pomeroy is the founder of Big Change Advisors, a Los Angeles M&A advisory firm of business advisors and capital sourcing advisors for startups and middle-market companies. Since 1992, Steve has completed over 38 transactions including M&A, Capital Sourcing, and Public Offerings representing over $800 million in total transaction value. Through Big Change Advisors, Steve donates a percentage of all fees – or invites clients to donate a portion of Big Change Advisors fees – to help serve the homeless through the Los Angeles Mission. To request a free consultant, contact Steve here.