Company acquisitions is often referred to as an intense and laborious process. Even though this is to be expected, another way of approaching it would be by analyzing the situation and figuring out why it is like that. Usually this has an underlying cause of negative character and will often result in surprises.
A large part of the job will be to find out what the desired industry plans to aim for. To aim in the direction of close industries you have interests in will benefit from the purchase of your first 2 to 3 companies. As they are incorporated into the portfolio, they can still focus on industries based on factors that affect a business independent of industry. These are often featured in the media as future-oriented, political, environmental, digitization, social factors, etc. Good examples of this, which have clearly affected businesses, are environment and politics.
When moving into new industries and investing in analyzing information about economic, commercial, organizational, legal, risk and future conditions, it is with no doubt right to use audit firms, law firms, business brokers or some individuals with expertise within the area. The latter one often works with one customer at a time and is closer to the details, therefor less surprises.
Current state of the company - After finding the available sellers, it is time to assess whether companies can deliver solid returns over time.
Based on previous experience, the company should be in a growth phase or have the possibility to be turned around. In addition, the buyer must have the capacity to implement the company's business plan. Another crucial factor is the trust relationship between the buyer and seller, that there are no obvious "deal breakers” as well as correct pricing.
Obtaining information - Due diligence-process is a critical step. It is where you go through the accountancy and other relevant information related to the company.
In Norway, all companies with revenues over five million kroners must use an independent auditor, and it provides assurance that the financial information presented is reliable. If the buyer lacks experience in this type of process, counselors should be used to assess the quality of the information, and advise on how to better the conditions of the price so that the acquisition agreement can be fulfilled.
Determining Value - Valuation of companies is by itself an extensive theme. You should consider measurable factors as well as the company's subjective attractiveness for you or your competitors.
Determining the company's theoretical market value is not a precise science, but there are accepted and commonly used methods such as discounted cash flows, income- or EBITDA-multiples, and comparison with similar companies and similar transactions.
The company's market value should also be adjusted for debt, normalized working capital and other liabilities.
However, buyers may be willing to pay more than the theoretical market value, for example due to possible synergies of consolidation, or high demand for the company.
Gradual acquisition is a plus, but can result in clutter and focus loss. After the buyer and seller have agreed on a price, the transaction must be funded. Equity is one way of funding, but often there is a loan and eventually seller credit.
I think that the acquisition itself does not have to be an intense process, but laborious. Successful acquisitions depend on a well-prepared integration and business plan with close, engaging and effective communication with employees, customers and suppliers. With a high priority on employees.
There are many parameters that should be processed in advance if you are not familiar with them. Some of which I have already written about in this post. Below are mentioned a few more.
- Employees relation to the management
- Documented processes
Please share your opinions on this post. If you are in a process of buying or building your business, you are most welcome to contact me for a more detailed conversation through my LinkedIn or Twitter account.