How to prepare your acquisition strategy

Growth through acquisition can be a highly successful business strategy – but it is also a difficult one to get right. KPMG famously suggested that 83% of merger and acquisition activities fail – so getting the groundwork right up front is time and effort that is definitely worth it. But with so much emphasis placed on the crucial financial details - such as valuations and due diligence – it is easy to apply less attention and fewer resources at the critical first stages when the reasons for buying a business in the first place are defined.

That’s why it makes sense to take some time to review these three crucial steps. Completing them in full could make all the difference between a positive and profitable acquisition or one which is problematic and potentially loss-making for your business.

Step 1: Agree business acquisition goals

There is no magic formula to make acquisitions successful. Like any other business process, acquisitions are not inherently good or bad, just as marketing and R&D aren’t. Each deal must have its own strategic logic. Acquirers in the most successful deals have specific, well-articulated value creation ideas, goals and plans.

The first step is to take time to discuss and agree what the business wants to achieve with the purchase. McKinsey identifies the following successful business acquisition types:

1. Improving the performance of the target company
2. Removing excess capacity from an industry
3. Creating market access for products
4. Acquiring skills or technologies more quickly or at lower cost than they could be built in-house, exploiting a business’s industry-specific scalability
5. Picking winners early and helping them develop their businesses

When thinking about your business goal(s), remember the acquisition should act as a stepping-stone from where your company is now to where you want the future combined company to be. And don’t forget that measurement is critical: to do so, you need to define what ‘success’ will look like. What will the acquisition ROI be? How will increased revenue lead to increased profit? Are you willing to take a short-term loss for a longer-term gain? What is the timeline for profitability?

Step 2: Set up your screening process

Once you agree what you want to achieve from an acquisition, then you can start the search for a company to buy. Create a screening process that not only enables you to identify positive attributes – but that also helps you to screen out candidate companies that may prove unsuitable in the long run.

In addition to your pre-defined financial specifics, screening criteria should also cover other elements such as strategic compatibility, product and service synergy, technological competence, approach to innovation, market position, geographical locations, linguistic and cultural similarities and differences, infrastructure and speed of response.

Your screening process could also include the following:

• Organisational and operational challenges of integrating the company
What are these challenges? What is the potential impact on your business? Are there data and evidence-driven studies that show how these can be successfully overcome?

• Revenue and cost models for the combined company
Are these robust enough to be attractive and sustainable? Can enough revenue be generated without being outweighed by the costs? How does the longer term forecast look, taking into account potentially adverse economic or market conditions?

Throughout the screening process, take care to avoid becoming obsessed with buying any company. Be aware of pain points as well as the benefits of a purchase – or you may end up spending more time and money than the acquisition is worth.

Step 3: Get to know the seller

Incompatibility is one of the most commonly cited reasons why acquisitions fail. That can refer to a lack of compatibility between companies, people or the company culture. On the other hand, some of the most successful acquisitions have come about thanks to positive chemistry growing from an existing business relationship. This is helpful as it can make negotiations easier, simplify due diligence and provide insight into the potential for successful integration.

Although many acquisitions begin with a discreet meeting between CEOs, it is important to appoint a deal leader at the earliest opportunity. This individual should be comfortable with legal and financial detail, and be able to engage with and gain the support and confidence of the management teams on both sides.

And don’t ignore the workforce. A useful and insightful way to understand the culture of the company you are buying is to review employee satisfaction surveys and staff turnover rates for the past five years. Be aware that long-standing employees might be highly committed and loyal – or they might be mediocre and the dynamic talent tends to move on. What is important is to look beyond the statistics and understand the reasons why staff stay or go. You may well discover a very different story to the one you are hearing from the senior leadership team.

What next?

Once you’ve completed these first three crucial steps, if the company you are considering is still in the running, it’s time to drive forwards on to the due diligence phase. This takes you even further into the details, assessing the risk and opportunity that buying the company would bring, and carefully examining financial statements and tax returns, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), debt – including any financial guarantees and hire/lease agreements, company forecasts, plans, budgets and working capital.

Don’t forget the people element here too. Are there key people who would transfer with the business or will they look to move elsewhere? For senior staff you would like to retain, it can be effective to include them as part of your integration team as a way of getting their ‘buy-in’ to the acquisition and to use their expertise to help shape success going forwards.

If you are successful in your preparation and due diligence, you may be on an exciting acquisition journey and will need a strategy to help document and communicate to stakeholders. Below we have outlined what to include in a business acquisition plan.

What to include in a business acquisition plan

A business acquisition plan is similar to a start-up business plan, it should detail the approach for buying and managing the acquisition. The plan should document and inform all stakeholders about how the acquisition will be planned, executed and managed throughout the project.

Here’s an summary of what to include in a business acquisition plan:

Overview:

1. Executive summary
2. Financial objections (including history)
3. Business acquisition costs

Market overview:

4. Market size
5. Market segmentation
6. Location
7. Demographics
8. Needs of market

Marketing information

9. Marketing strategy and objectives
10. Competitive analysis
11. Competitive advantages

Operations

12. Management and key team members
13. SWOT Analysis
14. Barriers to entry

Investor information

15. Investor contribution
16. Use and the allocation of funds
17. Job descriptions and job creations

5 year projection plans

18. Forecasts – revenue and personnel
19. Cash flow statement
20. Balance statement
21. Income statement
22. Financials indicators and assumptions

The Access Group provides valuable software, systems and reporting tools to help CFOs and Finance leaders to work more effectively – including when making the many judgements needed to support acquisition decision-making. Visit our finance software page for more information.