Ten tips for buy-side M&A success

Does your business strategy include growth by acquisition? Does your team have experience negotiating and executing M&A transactions? Large multinationals that are serial acquirers may have a corporate development function tasked with leading strategic acquisitions and may even have dedicated in-house M&A counsel. SMEs, however, and even large businesses that are only occasional acquirers, simply do not have that luxury.

Pursuing an acquisition can be daunting for those who don’t do it regularly. In this article I set out ten ‘big picture’ tips to help you – the Purchaser – prepare for success in your next acquisition.

Tip #1 - Know your WHY

In the words of Simon Sinek, “Start with WHY”. The obvious purpose of pursuing an acquisition strategy is growth . . . but why focus on this transaction, this target company, at this time? For example, a Purchaser might be seeking:

• specific technology, intellectual property, or other assets;

• geographic expansion;

• access to a particular market or market segment;

• expanded capacity; and/or

• unique skills and capabilities.

One Purchaser I represented sometimes pursued acquisitions as a defensive tactic to prevent the target company (Target) from being snatched up by key competitors!

Your WHY is your own. Acquisition success requires that a Purchaser understand its WHY from the outset. This enables you to seek the right acquisition target, establish clear goals for what you expect to achieve from the deal and better negotiate the terms to achieve your goals.

Tip #2 – Know your Target’s WHY

Just as you have your reasons for pursuing an acquisition, the Target has its reasons for selling. The obvious answer to a Target’s WHY is financial, i.e. money in the bank (or to pay off debt). But cashing out is not necessarily the only reason to sell, or why a Target is open to a sale at a particular time. It may be that the founder(s) have reached retirement age or are simply burnt out, or the Target is a start-up or emerging growth company that recognises it cannot scale to its full potential without greater resources and capabilities than it has access to on its own.

A Target’s WHY is a critical piece of information, especially where the Target owner(s) anticipate continuing with the business post-acquisition. Every Purchaser should seek to understand this because it will affect the acquisition negotiation, terms and timeline.

Tip #3 - Consider your priorities and risk tolerance in DD

You likely have an appreciation of risk tolerance in the context of managing the company’s day-to-day business. Further, a Purchaser’s balance sheet (and access to debt funding) will help define the financial terms of the acquisition business case and the non-binding indication of interest or term sheet. These factors will influence the scope of your due diligence (DD) from a financial risk tolerance perspective. For example, if you only plan to review Target’s customer contracts with an annual value of $100,000 or more, you may not need to request that a copy of every contract be disclosed during diligence; doing so wastes the Target’s time and may even limit a Purchaser’s ability to make a breach of warranty claim under the sale and purchase agreement (the SPA) at a later date. You may wish to stage your DD review to focus on particular areas or confirm specific assumptions, such as IP ownership or sales pipeline. Consider your threshold of materiality and your areas of priority when preparing the initial DD information request; you can always revisit the scope of DD as the deal progresses or if circumstances change.

Tip #4 - Know your walk-away triggers

The late Kenny Rogers famously sang, “know when to walk away and know when to run”. Identifying your walk-away triggers on an M&A deal goes hand in hand with Tips #1 and #3 above. Understanding your WHY and your risk tolerance will help you pursue a focused and efficient acquisition process and knowing when to walk away could help you avoid closing the ‘wrong deal’.

The financial metrics provide a clear walk-away trigger because they are (relatively) objective. Your DD on the Target should also be designed to gather relevant qualitative information to use in your decision-making. Your walk-away triggers, or ‘non-negotiables’, might include culture fit, sophistication of processes, or scalability of key technology. Of course, legal and regulatory issues can kill an M&A deal, especially if the Target cannot validate its ownership of key intellectual property or other critical assets. But many legal issues can be mitigated, and deal terms renegotiated, to allow the acquisition to continue if the business case is otherwise met.

Tip #5 - Establish clear roles and responsibilities

Initially, a Purchaser’s deal team may include only two or three people; in a small company, for example, it may start solely with the CEO and CFO (plus the board of directors). Consider carefully which personnel are needed, and when to bring them ‘into the tent’. Pre-deal discussions are often kept to a tightknit group for confidentiality reasons; it is less likely for a Purchaser to inadvertently violate an NDA with a Target when only a small group are privy to the Target’s confidential information.

Eventually, your DD team should include people tasked with responsibility for the following functional areas, at a minimum:

• financial and accounting;

• legal;

• tax;

• sales/commercial; and

• people/culture.

Tip #6 - Engage counsel with appropriate expertise

Your deal team should include M&A counsel who does more than ‘dabble’ in acquisitions and who also has expertise in the Target’s sector.  A Purchaser may have in-house counsel who supports day-to-day commercial matters, or external counsel who has assisted with the company’s launch, property, employment or litigation matters. The institutional knowledge those advisers have can be helpful . . . but if they are not experienced M&A counsel, you are unnecessarily handicapping your acquisition’s success. Ask potential counsel about their M&A experience . . .

• How many transactions have they been involved in?

• In what capacity?

• In what industries?

• With what types of buyers and sellers?

• With what degree of complexity?

You deserve to have M&A counsel who has ‘been there, done that.’ Qualified M&A counsel should be willing to partner with you – including your in-house counsel and other external advisers who support the deal team – throughout the process.

Tip #7 - Involve qualified advisers early in the process

Identifying the external advisers (whether M&A counsel or others) that you require to build a winning deal team is more effective if you get them involved early in the transaction process. Foundational planning with these advisers will also help you save money in the long run. In the pre-deal and early stages, for example, qualified M&A counsel can help a Purchaser:

• negotiate terms of the engagement letter with the investment banker or financial adviser (if engaging one);

• identify other specialist counsel that may be needed during the transaction;

• draft an appropriate form of NDA for you to provide to potential Targets;

• craft the term sheet or non-binding letter of intent that sets the tone for the transaction; and

• prepare the legal DD information request.

Your external advisers, including M&A counsel with the relevant sector expertise, can serve you better if you share your WHY and your risk tolerance at the beginning of the process.

Tip #8 - All SPAs are not created equal (OR: SPAs are not widgets)

Except in auction scenarios, the Purchaser’s counsel typically prepares the initial draft of the SPA. Experienced M&A counsel will start with a well-developed template SPA, however, SPAs are lengthy and complex agreements especially where the transaction is multi-jurisdictional or in a highly regulated industry. The SPA should take into account a Purchaser’s WHY and its risk tolerance and be tailored to address the unique attributes of your industry and the Target’s business. A ‘good’ SPA is not a widget that can be pulled off the shelf to use with any purchaser, for any business, in any industry.

Tip #9 – Consider your timeline (and be realistic)

A Purchaser’s ideal completion/closing date may be motivated by external factors such as a desire to announce the transaction by a particular date (e.g. at an industry conference) or to align it with the end of a financial period. Create a target transaction timeline that takes into account any factors relevant to your strategy, then build in contingencies for delays and consider alternate dates. Most (if not all) transaction timelines evolve and change for various reasons including DD delays outside a Purchaser’s control. As the Purchaser, you have some control over driving the timeline, but you’re not the only car on the road! Review it with your deal team regularly as you track progress against it, and (barring any strategic reasons for keeping your cards close to your vest) discuss it with the Target.

Tip #10 - Start your integration planning early

If your company is new to the role of acquirer, then you won’t yet have experienced the joy of acquisition integration (sometimes referred to as post-merger integration or PMI). The introduction of new people who are accustomed to different processes than yours, new offices or facilities, new customers and suppliers, etc., is not to be underestimated. It is a time-consuming effort and there are multiple models to consider, but with careful planning you can set yourself up for success and show the Target team (and your existing team), from ‘Day One’ after the deal closes, why the acquisition is a positive development for everyone.

Proper PMI planning requires a multi-disciplinary team and functional roles in a similar way to the DD team, although they are not necessarily performed by the same people on the DD team. Think about who will assume the required roles, form your PMI team and start establishing your integration plan well before the transaction closes, using the knowledge you have gained from your DD review. Considering your PMI plan early can also help a Purchaser crystallise its views on the treatment of certain assets and liabilities for purposes of the SPA terms. A successful acquisition is often evidenced by the Purchaser who is executing a well-considered PMI plan on Day One, as opposed to the Purchaser who is only just beginning to prepare it.

Navigating the complexities of mergers and acquisitions can be daunting, especially for businesses without dedicated in-house M&A counsel. Contact us to learn how our team can support your next acquisition and drive your company's growth.

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