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M&A – how to find the perfect deal (part 2)

In part 1 of this M&A article I described why you may want to consider an acquisition.  Here are some of the reasons:

  • Reaching a wider customer base and increasing your market share
  • Diversification of the products, services and long-term prospects
  • Obtaining quality staff or additional skills
  • Reducing your costs and overheads
  • Accelerating your business plan
  • Accessing funds or valuable assets for new development
  • Regional or National Growth
  • Reducing competition

In this article I will explore how you can identify suitable targets and progress towards a successful integration of the business.

Identifying targets for mergers or acquisitions

Once you have decided that a merger or acquisition is the right move for your business, the next step is to identify a suitable target. First, develop a profile of the type of firm you want. Gather and review as much relevant information as you can on the markets, companies, products and services you need. Once you have developed the target profile, consider firms you deal with already. Many acquisitions and mergers take place between companies that have an existing commercial relationship. The most effective way to find a target is usually through a professional adviser in your sector. They should be experienced in handling deals similar to the size of both yours and the target business.

Valuing the business

There are a number of different methods used to value businesses, and often the value placed on a business by one buyer will be quite different from another. Net Asset Value, EPS, PE Ratios and Discounted Cash-flows are a few of the more common methods used. Your professional adviser should be able to supply you with valuations based on pre-acquisition and post-acquisition scenarios so that you can see the real value of the transaction to your business.

Due Diligence

It is key in any acquisition or merger to undertake a substantial examination of the target business in the due diligence process. Focus not only on the financials, but also on the systems considering how easy it will be to integrate, IP assets including patents, fixed assets and leases, employment contracts and pension fund liabilities.

Funding the Acquisition

There are many different forms of funding available, and alternative funding models should be examined to find the best one for your business. In funding an acquisition, allow for not only the purchase price but also the post acquisition merger expenses. Ensure you have a consolidated post-acquisition cash flow to show your funding needs, and remember that borrowing short term to acquire long term assets can be a risky venture. Similarly, sourcing cheap funds in a foreign currency carries with it an exchange rate risk that should be taken into account. If you are a public company then a share swap maybe the simplest funding route, but if you have substantial reserves of funds, a cash offer may be better for your own EPS ratio and may also be more attractive to the seller. Your new merged entity maybe large enough to consider an IPO to use public funds for the acquisition, but the use of public funds brings with it substantial responsibilities and regulations that must be considered. Private Equity Investment Funds have become a popular way of funding acquisitions. There are a number of these organisations active in the UK. Your professional advisor should be able to introduce you to Funds that specialise in your sector.

Post acquisition management

Be sure that you have considered carefully the management structure for the new merged entity, taking into account the skills needed to run the new larger entity and assess carefully the management capabilities you have in your existing business and the target company.

The first 100 days

Remember it is key to have a clear post acquisition strategy and to get that plan into action immediately. Don’t forget to be visible. It is important to communicate clearly your intentions and goals for the newly acquired or merged organisation.

If you need help in considering your approach to a potential merger or acquisition then  The Lamberhurst Corporation can assist.  We have experienced consultants who can work with you through the process from initial targeting to valuation, funding and integration.

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