M&A Advisory:

Guide to Buying a Business

From strategic planning to transaction management to post-close integration, diligence is key to a successful acquisition.

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Between 70% and 90% of M&A transactions fail according to a study by The Harvard Business Review. Researchers argue more buyers would succeed if they did a better job selecting their target company, figuring out the right price, and knowing the right integration approach for the new company. A lot of this comes down to the critical diligence work of M&A advisors.

Decisions about investing in a business are best made when informed by research and expert analysis from experienced professionals.

By leveraging the expertise of a qualified advisory team early, you can take a holistic approach to the process. From deal strategizing to due diligence to closing and post-purchase integration, building a strong M&A team improves your chances for success dramatically. Every acquisition is unique, but here are the common stages and key milestones to be aware of.  

merger-deal-strategy

Deal Strategizing

Discretion and candid advice are critical early in the process as you form your acquisition rationale. You want to go shopping with a plan. Otherwise, you risk buying a company that may look good on paper, but not help you meet your goals once the deal is closed.

Most acquisition strategies have components of one (or both) of these goals: 

  1. improving financial performance 
  2. reducing risk

If your goal is improved financial performance, then you need to do some advanced accounting and complex modeling of multiple scenarios before you settle on a target company. You have to look at whether buying an asset or building up your existing capabilities makes more sense. Get advice from experts in the industry you are exploring so your projections are as informed as possible. 

It is important to engage an experienced M&A attorney as part of your team. They help to structure the deal on the front end and examine the implications in terms of tax efficiency and legal liability.

Stick to Your ‘Why’

Whether you are a strategic buyer, looking at a long-term play, or a financial buyer, thinking of an acquisition as an investment with a fixed horizon, your reason for a transaction needs to be rooted in hard numbers and the best evidence available. This will inform whether an asset purchase, equity purchase, or merger makes the most sense because there are significant tax implications based on this decision.  This is even the case if you’re a closely held company amid succession planning.

A corporate development team may see an acquisition as part of a larger strategy, like strengthening relationships with your customers or building out a new service offering that may include other acquisitions. 

The right M&A advisors will understand your motivations and support you with deep analysis. They can help you set the right metrics for what success looks like–a crucial piece of any eventual integration. 

Work with your M&A advisors on your goals, know what kind of buyer you are, and your strategy will be easier to set. This will inform your plan for sourcing the funds for the deal and whether or not debt financing makes sense. Here, an M&A advisory team can help you with strategies for raising capital through the connections and experience they bring to the table. They can help you create metrics that will guide you through the process.

Due Diligence

doing due diligenceDue diligence is perhaps where your M&A advisory team can add the most value. Transactions include a significant amount of minutia—which can lead to deal fatigue if you’re not careful. But the information your advisors uncover is critical to improving your odds of success. Due diligence should not be something that starts after your strategy is in place either. It should inform strategy and help create critical documents like the Indication of Interest (IOI) and the Letter of Intent (LOI). 

You will get more well-rounded insights and have a better chance of reaching the closing table by working with transaction and diligence advisors who have experience creating and analyzing financial statements, quality of earnings (QoE) analysis, and the myriad of other documents involved in due diligence.

Each of the reasons cited by the Harvard experts on why transactions fail (wrong target, wrong price, poor integration) can be addressed by due diligence. You will need to verify information, find variances, identify possible areas for improvement, and make sure the acquisition aligns with your initial goals. All of this informs what value is assigned to the company you are pursuing. 

Financial Due Diligence

You want to look forward and backward during the financial due diligence process. Looking ahead means analyzing forecasts, identifying synergies, and developing high-level integration plans for processes, metrics, and reporting. All of this informs the future potential of the company.

Looking backward means studying the financial statements. A best practice is to get a QoE analysis that covers:

  • Sales and profitability analysis
  • Normalized earnings for:
    • Cash-to-accrual conversion
    • Non-recurring transactions
    • Non-operating transactions
    • Run-rate adjustments for operational changes
    • Out-of-period transactions
  • Cash proof of revenue and expense
  • Free cash flow
  • Annual and monthly recurring revenue for subscription-based businesses
  • Customer churn
  • Net working capital
  • Debt and debt-like analysis

A transaction and diligence advisor can help you spot potential red flags in a QoE analysis and complement it with other financial insights.

Once the QoE analysis is complete it can be used to calculate the target company’s adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). The price for the acquisition of a company is often based on a multiple of its adjusted EBITDA, so this complex step is incredibly important.

Other Areas of Due Diligence

Thorough due diligence goes well beyond just a company’s finances. The process is unique for each transaction. An experienced transaction and diligence advisor on your M&A team can help you understand the fundamentals in each of these areas as well.

  • Tax diligence—both looking back and looking ahead
  • Operations diligence—forward looking for how a company will be integrated and/or run
  • IT diligence—security, infrastructure, systems, and processes
  • Legal diligence—litigation that is pending, threatened, or settled
  • HR diligence—human capital, procedures, and policies
  • ​​Commercial diligence—position in the market combined with market insights

Involving M&A transaction advisors familiar with the legal structures of companies (i.e. LLC, S-Corp, C-Corp, etc.) can also help ensure your purchase results in an entity that is organized in the most favorable way from a taxation perspective.

Closing and Integration

individuals at the closing tableThe due diligence phase is critical to achieving everyone’s goal: reaching the closing table with no surprises. As the buyer, you want to make sure the diligence and legal teams are on track and there is an agreement between all parties regarding net working capital and debt-like items. 

Communication is critical at every stage of a transaction, but it takes on even greater importance as you approach the finish line. A lack of communication creates questions and doubts about a deal closing. You have to remember the stress is mounting for the seller as each day passes. They really want to avoid a retrade. 

Pro Tip: Set the close of a transaction on the last day of the month. This makes it easier for things like closing the balance sheet and the net working capital true-up. However, you need to be on top of all the moving parts leading up to the close so you do not have to delay the date and muddying up the numbers by including part of an additional month.

Integrating Success

How smoothly the business integration goes after the purchase can ultimately determine whether a deal is a success or not. You can expect a few glitches, but if you have planned well in advance, Day 1 can start off on the right foot. The key words to remember during this time are: evaluate, plan, and transition. 

The successful integration of a business plays out in four phases (these can overlap somewhat).

1. Transfer of ownership pre-close through day one

It is essential processes continue and people stay on task. Before your deal closes, you must have plans for: 

  • The transition of ownership, leadership, and reporting
  • Financial and operational capabilities and reporting (select aspects) 
  • Payroll and benefits

2. Stabilization

Instability can kill the value of a deal. As the new owner, you must be focused on value preservation through melding business operations and culture. Advisors who specialize in business integration can increase the probability of success and speed up the process by leveraging their experience and implementing proven strategies, especially for small to midsize companies. Business integration experts with previous experience can support decision-makers in these areas and others. 

Strategy 

  • Supporting the full articulation of the go-forward strategy
  • Preserve important client and commercial connections
  • Synergy opportunity identification

HR and Finance

  • Maintain payroll and benefits
  • Work with vendors to preserve relationships
  • Financial processes 

Operations

  • Ask the right questions to identify critical processes, detailed transition requirements, or optimization opportunities 
  • Identify metrics to assess progress and success

Technology

Change Management

  • Communicate and support process changes
  • Preserve existing value in the company
  • Build commonalities
  • Be the “North Star” on common goals
  • Be aware of cultural differences and look for ways to bring people together

3. Value realization

Now you are driving your integration plan to execution. Work should follow your strategic vision and plan to realize the value you identified and be guided by the key metrics you previously identified.

4. Value creation

How will you move beyond just cost synergies to expand value through market, customer-centric, or product expansion? There are many pathways and M&A advisors who have been through similar acquisitions can help accelerate the process.

In any M&A transaction, you need the best information and insights you can get. Including a team of professionals who have experience closing deals and integrating acquisitions will increase your chances of success.