“This is an important milestone for Facebook because it’s the first time we’ve ever acquired a product and company with so many users. We don’t plan on doing many more of these, if any at all.”
Mark Zuckerburg, Facebook CEO, Statement on acquiring Instagram.
Even for the most reluctant, the allure of deal making is often too strong to resist. When Facebook acquired Instagram in 2012, paying $1 billion for the then – nascent photo sharing app, he may genuinely have thought it was the last time he’d open the checkbook. But fast forward less than ten years later and his company has been involved in 50 further transactions, including a $19 billion acquisition of Whatsapp in 2014.
Facebook is not alone in its zeal for a deal: in the two decades since 2000, the Institute for Mergers, Acquisitions and Alliances (IMAA) estimates that, globally, there have been just short of 800,000 transactions with a value of approximately $57 trillion. And yet, by all accounts, around half of these deals will be poorly implemented, with managers neglecting to put in place a proper M&A integration framework.
At DealRoom we help many companies during M&A process and the steps which follow can be seen as a brief guide for acquiring a company.
But let’s start from the beginning.
When to Acquire a Company
- When strategic growth is your goal, acquiring a business makes logical sense. For instance, the Harvard Business Review notes that successful companies not only rely on acquisitions for growth, but also find that this route often comes with less cost and risk than other growth methods.
- The business acquisition process must begin with a crystal clear strategic goal and specific criteria for evaluating potential targets. When you have both, you can seriously begin working to acquire a company.
- When a target meets your strategic goal, and there are no red flags as you move through due diligence and begin to develop relationships with its stakeholders (here you must realize keeping an eye towards integration and change management/culture are essential), you can move forward with the process of acquiring a company.
- Finally, you should not pursue the acquisition of a company when you are overly emotional or “deal hungry.” Specifically, do not let the lure of the chase and/or perceived fantasies about what the deal might yield be factors when you acquire a business.
So, let’s continue with steps in acquiring a business and company acquisition process.
How to Acquire a Company/Business (Steps)
1. Establishing a motive for the acquisition
Before acquiring a business and doing anything, there has to be a good ‘why’.
What motivates you to buy a company? The overarching answer to the question is ‘because I want to grow the business’, but you need to be more specific. Broadly speaking, the motives for buying a business fall into the following categories:
Ask yourself which of these is the driver behind your motivation behind an acquisition. It could be a few of the reasons, but the likelihood is that if there are too many on the list, your thinking for the acquisition has become muddled.
This will only create problems down the line, potentially leading you to acquire the wrong business. Be honest about what you want and stick to it.
For a pinch of inspiration, see 11 powerful acquisition examples and what we learned from them.
2. Create search criteria
The search criteria are a natural extension from establishing a motive.
How much are you willing (and more importantly, able) to spend to acquire a business?
- Which markets should it be operating in?
- What kind of client base should it possess?
- What kind of synergies are you looking for, if any?
The more questions you ask about the company before you begin searching, the more efficient the search will be.
There’s room for some flexibility, but just as with the previous section, the more specific you can be, the better.
One word of warning – it’s most important to establish the financial criteria (how much you’re able to spend and the financial position of the target) before beginning.
There will invariably be a business just outside your price range which is more attractive than those within it. Maybe they have a bigger market share, a better range of products or a more engaging management team. The advice here is straightforward – if you can’t afford the business, don’t acquire it.
Not unlike Zillow or Trulia in real estate, in the realm of M&A there are dozens of databases online where business owners and their bankers list businesses for sale.
The one most suitable to you will depend on the size and geography of your business. However, it’s generally useful to sign up for a few, allowing you to cast a wider net to find the right business.
The benefit of spending some time on these M&A databases, aside from helping you to find what you’re looking for, is that it enables you to compare what’s on the market and the range of prices being sought for businesses in your space.
If you opt to contact a business you’ve found through an M&A database, you’ll generally speak with their banker first. This individual will act like a gatekeeper to the business, establishing your interest in the company before providing you with the company’s confidential details.
The standard procedure here is to ask you to sign an NDA before providing you with a detailed memorandum of the business and its past financial performance.
If, on the other hand, you’re looking to sound out a local business about a potential offer, they’re unlikely to be for sale online. In such cases, there is no right or wrong strategy.
You can ask your lawyer to check their willingness to discuss a potential takeover, or you can approach the owner of the business yourself, being as transparent about your motives as possible without compromising details of your company’s strategy.
5. Intro meetings
Beyond that first reach out, introduction meetings give you a chance to meet the owner of the target business and hopefully, build a report.
If you do end up acquiring their business, there is every chance that they can play a key role in the integration of the two businesses, so it’s in everyone’s interests to stay on good terms.
Also, use these meetings to feel out the company’s culture – what’s brought them to where they are, how their employees are rewarded, etc.
6. Making an Offer
If, having become well acquainted with the company, you still like what you see, it’s time to make an offer.
The offer should balance your own purchase criteria, market comparables (what kind of multiples of EBITDA are being sought in the market for similar companies) and what the owner has intimated they’d accept if it was offered.
This last aspect is important. Nobody likes being ‘low balled.’ In the worst cases, it can be taken as an insult if your valuation is way off that of the owner’s, and you risk alienating them for future deals.
If you sense that you’re both too distant in valuation expectations, be honest about it at the outset and avoid wasting everyone’s time.
7. Due Diligence
Assuming the owner accepts the non-binding offer, you can move onto the due diligence phase. Depending on the size of the company, the process of due diligence can take anywhere from three weeks to three months, but about four to six weeks is typical for SMEs.
This is your last chance to find skeletons in the closet of the business (if they exist), so don’t rush the process. Use it as an opportunity to become more intimately acquainted with how it operates, so that you can hit the ground running when the deal ultimately closes.
To help companies with due diligence, we put together a complete due diligence playbook that outlines each step of this process. Get a free trial now!
Closing the deal will require some assistance from your lawyer to put together the documents you require:
- operative transaction agreement such as stock purchase agreement
- legal opinions
- regulatory approvals
- evidence of third-party consents
- consideration such as stock or cash
- ancillary agreements
- binding offer
- terms of funds transfer
If you’ve reached this stage without any hiccups, the integration phase can begin in earnest. You can also download our post merger integration checklist here to help with integration.
How Long Does it Take to Acquire a Company
The steps and time involved with acquiring a company or merging two companies can vary greatly depending upon the specific deal and its size.
A general time range is approximately 6 months to a year (sometimes longer). This lengthy time frame includes planning and identifying targets, moving through diligence, and deal approval.
Of course, the deal can be closed, but integration and change management practices can take quite a bit more time.
How long it takes to acquire a company can also be dependent upon the following:
- The buy-side’s desire to close the deal quickly
- The sell-side’s ability to generate competition
- The size of the companies
- The involvement of M&A advisors and financial bankers (they tend to speed up the process)
- The preparation of both the buy-side and the sell-side (are checklists created, is key information readily available?)
- The ease of the technology and project management platforms used to communicate and share key information
The vast number of acquisitions every year (in excess of 30,000 in 2018) suggests that companies of every size all over the world place faith in M&A to deliver growth.
The companies that succeed in doing so, are the ones that most effectively implement the steps we have outlined above.
By putting in the groundwork and spending time to find a business which is a good fit with your own, there’s every reason to believe your acquisition can deliver significant growth.