Take a look at the key points below for an overview of what to look for when acquiring a company, as well as important steps in the small business acquisition process.
Whether you are in the evaluation phase and still weighing up whether or not to acquire another business, or in the final stages, there are five key areas where you must take time to thoroughly assess the facts. It’s important to be fair and measured to ensure that if you do decide to finalise the acquisition, it’s crystal clear exactly what you’re buying as well as the potential benefits and risks involved.
1: Good fit (achieving more together than apart)
It may sound obvious but think hard about how this business would fit with your existing company. Are the two brands compatible? Are you duplicating skills or adding new ones? Does the acquisition expand and grow the products or services you can offer or might it in fact compete with some of what you already provide? What new opportunities would an acquisition offer – perhaps from combined functions or services, or new customer offerings for example.
2: Market readiness (getting out of the starting blocks quickly)
You need to make sure there’s enough competitive advantage from the new business and preferably not in a price sensitive sector as this is much harder to predict. And make sure that the business you’re looking to acquire has good systems, processes, and technology in place to enable you to get up and running quickly. Determine how you’re going to integrate these systems with your existing business as this will save a lot of heartache and potential delays in the long run.
3: Financial health (forensic dissection of the numbers)
It’s easy to lose money on a purchase if you don’t do your financial homework. If the company you’re looking to acquire makes this process difficult in any way, take care to pause and ask why. It’s far better to walk away from in good time than risk getting into something that potentially causes serious issues later.
Closely examine the financial statements for at least the last five years, along with tax returns, planning, forecasts and budgets. Check that the financial situation is accurately described by the seller.
Other important financial information to dig into includes:
- EBITDA (earnings before interest, taxes, depreciation and amortisation): The purchase price is often calculated as multiples of EBITDA. Check that any non-recurring items, such as gains and losses from acquisitions or sales of fixed assets have been removed from the EBITDA figure.
- Debt: A high amount of debt and a high level of leverage may lower the purchase price. Also, consider any financial guarantees and hire/lease agreements.
- Historical cost and revenue data: Review this to see if revenue and profitability trends show signs of seasonality in costs and revenue.
- Forecasts: Use historical data as a guide to the accuracy of the company’s forecasts, planning and budgeting.
- Working capital: Check if a specific amount of working capital has to be delivered if the sale goes through. The amount will often take into account the outstanding sales, supplier and customer payment terms as well as seasonal effects.
- Cashflow: Look closely at ongoing costs and the monies owed to the business, including terms. Consider whether the acquisition will impact cash flow as this can place a heavy burden on the company. Also, will you be able to keep all the staff post acquisition?
4: Due diligence (uncovering any skeletons in the closet)
This is all about checking the finer detail and conducting thorough background checks into all areas of the business and its management team. Find out if there are any ongoing or threatened legal issues; are there any internal conflicts whether between the management team or with the workforce; are accreditations up to date – these are all key areas to consider, along with the following checklist:
- Certificate of incorporation, share ownership, the licenses held and any other areas to do with the registration of the company.
- Asset value – are these in line with industry expectations. Paperwork relating to all the assets included in the sale and any clauses need to be closely examined.
- Review all products and product lines, and consider seasonality and market share. Check production methods and quality/safety standards. Are they compatible with what you already use?
- Examine all legal documents and key supplier contracts. If the sale involves intellectual property, any copyrights, patents and trademarks need to be checked.
If you do discover issues, you must be prepared to walk away if they cannot be resolved. But also bear in in mind that some weaknesses may be fixable, or may not be that important. In some cases risks can be minimised, for example, by structuring the acquisition so that the price is lowered to reflect the final impact of any ongoing legal claims.
5: Compatibility (the people, the processes and the data)
The people
One of the underlying factors that can determine the success of an acquisition is compatibility. Take time to talk to employees and collate their views on key elements such as management style and staff morale. This is critical if employee retention or motivation is important to the ongoing success of the acquisition. Consider conducting one to one or group meetings with staff to get their input, or carry out an anonymised survey to collate viewpoints from across the business.
The processes
Part of the terms of the acquisition agreed between both companies may look at structures, people and what will be expected to remain in place. But if not, then it’s worth ensuring that all managers at the new company have training on how to treat all employees (established and migrated) equally, and also to produce a comprehensive on-boarding training programme that explains your workplace policies, practices and expectations.
Clearly your IT team should be involved in the discovery phase when you are seriously considering an acquisition as they will need to familiarise themselves with the technology and infrastructure in place and scope how much support and input will be required to integrate where necessary and to secure and run systems on an ongoing basis.
The data
Another key area to think about is the amount of data which needs to be merged. There is considerable risk attached to data transfer, as even small complications can lead to a damaged reputation – or, even worse, lost customers and a negative effect on future sales and growth.
To avoid the risks associated with data transfer and ensure a smooth process, try the following:
- Identify all data that needs to be transferred and delete what is obsolete before the merge as this will save time and avoid confusion later.
- Make sure you back up everything you are going to transfer and double check that it IS backed up before you start the transfer process.
- Assign a senior person with data experience to oversee the process and take responsibility for addressing the risks involved. Obviously, there are two companies involved in a merger or acquisition so it may be wise to also appoint a second in command from the other company.
- Train all staff on new data standards, policies and processes to ensure consistency of approach across all the data being merged.
- Keep customers, stakeholders and shareholders informed. Customers in particular have a right to know their data is being transferred and how you plan to safeguard it during the process.
And finally… Mergers and acquisitions are exciting, often creating new opportunities for current and future profits. However there will be challenges involved in the process. With hard work, good attention to detail, and some thinking outside of the box – it is possible to achieve positive outcomes for all.
If you are preparing for an acquisition and need to get your finance team and systems working at their best, contact Access. We have a host of ways to make life a whole lot easier for your staff and your business - see our finance software.