Defining the Buyer’s Perspective
In our previous guide, we analysed mergers and acquisitions from the seller’s point of view. Shifting to the other side of the coin, this guide will focus on the buy-side of M&A.
Purchasing a business requires a lot of thought, preparation, experience, and financing. But integrating two companies to strategically promote synergies, maximise value, expand into new markets and grow into a major market player presents multiple challenges, and it requires a substantial amount of knowledge, research, and advisory support.
In 2021, the M&A landscape witnessed an upturn attributed to increased private equity, economic confidence from the vaccine rollout, and low interest rates. As COVID-19 accelerated the move to a digital-orientated way of living, future-proof sectors saw significant increases in deal volume – namely, technology and information communication.
Moreover, regions with the most prominent deal volumes in 2021 were London, South West, South East, and Scotland. It is worth noting that buy-outs increased by 36%, and approximately 23% of transactions associated with London companies were funded through private equity.
Growing organically can be a difficult pursuit, and it requires an extensive amount of funding, research, and operational capabilities. Growing through M&A is a strategy to overcome these hurdles, and while buyers and sellers often execute the transactions to achieve synergies and eliminate competitors, the processes of engagement for both sides are significantly different.
Find out more: Looking to acquire high-value businesses? Explore MergerVault.
What Would the Process Look Like for the Buyer?
Before we elaborate on what the process would look like, it’s important to note that when discussing M&A, buyers are often grouped into two categories: a strategic buyer and a financial buyer. Depending on what buyer you identify as, the process could look slightly different.
For example, a strategic buyer’s objective is to typically execute horizontal or vertical acquisitions, whereby they identify an appropriate synergy target that will develop long-term business objectives. They can tap into the target’s market or product lines, or their client base and suppliers. This would ultimately improve their operational structure, or aid in overcoming challenges posed by competitors. A strategic buyer usually has a significant amount of capital, either in stock or cash.
A financial buyer’s objectives are different; they typically make investments in a company to realise financial returns. A private equity firm, for example, would identify targets that have potential for growth, including consistent financial records. If the target matches their criteria, they invest a specific amount of money into the company, and in several years, reap the returns of their investment. A financial buyer usually uses debt to finance a deal, borrowed from a lender.
Regardless of what type of buyer you are, when you identify potential targets, you’ll need to assess if you are an appropriate fit for a seller.
Some sellers want to exit the business and generate as much return as possible but want to ensure the business continues to run optimally. In this case, a strategic buyer would be the best fit. If the seller wants to cash out, but wants to retain a position in the company, a financial buyer would be the best fit.
This guide will offer a broad exploration of the undertakings you’ll need to consider as an M&A buyer. We’ll begin by providing possible criteria you can use to tackle your strategy.
Defining the Basis of Your Acquisition
Diving headfirst into target identification should only be done once you’ve defined the basis of your decision. Why are you pursuing the acquisition?
Your strategy for growth should align with your business plan, and you should have clear plan of when and how you will achieve it. When considering the alignment, you will need to have an intricate understanding of your business’s modus operandi. If you are not familiar with it, how would you know who the ideal target should be? You’ll need to have a clear understanding of the attributes you are seeking. Is it a new client base, new locations, a new market, or something else?
Once you’ve identified this basis, you should first and foremost, hire a reliable and experienced advisory team. They should be involved in every step of the deal.
Identifying Your Targets
Making a list of potential targets is not a quick Google search, writing names down on a page and then contacting them. Target outreach requires extensive local, national, and international knowledge of markets and their participants. Your advisor should exercise this knowledge and choose targets that align with your criteria and objectives.
Begin by creating a longlist of potential targets that suit most of the criteria. With the support of your advisors, this list will need to be refined based on your priorities. It will become a much shorter list, as some targets may not be interested at all, some may not have a pragmatic price, or some may prove to be a financially dull pursuit.
Begin Initial Contact
When you begin contacting your shortlist, it is crucial that your intermediary does this. Business owners may assume you are attempting to gain trade secrets if you approach them personally, especially if they are a target in your vicinity. While this may not always be the case, it is strongly recommended that your lawyer or investment banker contacts the target company in the first instance.
Usually, you will have to sign a non-disclosure agreement to gain specific insights into the company, and once this is done, you should receive a memorandum that discloses these details.
Gaining a Deeper Understanding of the Target Company
At this point, you have likely refined your target list to companies that resonate with your strategic profile and objectives. Buyers will benefit from conducting extensive valuations of the target company’s tangible and intangible assets, as well as its liabilities. BusinessesForSale.com offers a free tool that is dedicated to calculating pragmatic, reliable valuations.
You will want to make an informed decision, so understanding the target’s key revenue drivers and profitability will aid in informing your choices. It is essential that your advisors assess the intrinsic and strategic value of the company, investigating its current growth and scalability, and its potential for integration and diversification.
Find out more: Need an accurate, trustworthy valuation of a business? Try our free, online valuation tool.
Beginning the Negotiations and Due Diligence
Long before you conduct due diligence, you and the seller should meet regularly to see if you are a strategic fit for one another. This will begin with your first face-to-face meeting with board members and CEOs. Your advisory team should have the intuition and experience to know if someone is a poor fit.
Once you have submitted your letter of intent (LOI), you will need to discuss and negotiate the structure of the acquisition and deal terms. This will be a prolonged process as you will be required to address multiple issues. While the purchase price may be the ‘hot topic’, there are other issues you will need to consider:
- The intricate agreements relating to the purchase price (stock, working capital adjustments, earnouts, escrows)
- Representations and warranties associated with the seller and buyer, including contracts, and intellectual property
- Covenants of both seller and buyer
- Employee considerations
These considerations are wrought with legal and financial terminology and specificities, so it is crucial to have a lawyer present at all stages of the negotiations.
Due diligence is a critical phase for the buyer. At this point, you have likely spent months negotiating the acquisition, but you will need to be take your time on due diligence. When assessing the financial, legal, operational, and intellectual units of the target, always evaluate if they are an appropriate fit for you and your strategic profile.
There are multiple documents to consider, so this guide will only outline a few. Your legal team should have intimate knowledge of the contracts, documents and audits you’ll need to investigate, and they should carry out the due diligence. You’ll need to cover the following elements:
- Organisational structure
- Analysis of finances
- Analysis of assets and operations
- Legal matters
- Contracts and commitments
Financing Considerations for the Buyer
Funding an acquisition or merger requires a lot of thought and strategy. If your firm has a significant amount of capital, you can of course fund the transaction using cash. But this is not always the case.
It is very common for companies to fund acquisitions using multiple options. Some of these options can include:
- Equity financing
- Debt financing
- Leveraged Buyout
- Seller’s financing
- Bank loans
Closing the Deal and Post-sale Considerations
Closing the deal does not mean the end of your preparation and dedication. Extending due diligence findings into the completion stage will highlight if the deal is valuable, and if the seller’s information is accurate.
If you and the target company are comfortable to move forward and close the deal, your advisors will begin to prepare, negotiate, and finalise all necessary documents. You’ll need to negotiate the final agreement and ensure that both advisory teams work efficiently toward a reasonable closing deal.
A significant consideration at this stage should be how the seller and buyer will manage the integration to grasp the deal’s value and anticipate possible risks. You will need to have a detailed integration plan to follow, ensuring that the value and synergy potential both teams realised from this transaction is executed.
Find out more: Want to know more about the sell-side of M&A? Read the seller's perspective in mergers and acquisitions.
There are multiple benefits a buyer can enjoy from M&A deals. Growth, expansion, synergies, and increased market share are the most common. If the transaction is intricately planned and executed alongside a solid legal and financial counsel, the chances of a reasonable deal and a smooth integration phase are high.
However, M&A deals do fail. There is even potential for them to fail several years after the deal is closed. This is attributed to overestimating the synergy potential of the merger or acquisition, having an unclear strategy or purpose, poor cultural fits, and a lack of management involvement.
It is therefore essential that you choose a target that is an appropriate fit for your strategic profile, business goals, ethos, and corporate personality.
If you’d like further support in your buying journey, contact our dedicated team.