Justin DePardo | Director: Corporate Development
Growth through strategic acquisitions remains resilient. In 2023, mergers and acquisitions fell to their lowest level in a decade, according to Bain & Company. While the overall M&A market dropped 15%, strategic deals were barely down a little more than one-third of that volume.
The reason is simple – strategic acquisitions are about long-term growth. In strategics, buyers pursue targets that will help them strengthen their market positioning, add capabilities, or reimagine their processes and models, all in an effort to achieve long-term growth objectives.
The key to successfully executing a strategic acquisition begins with understanding the buyside process.
1. Define Strategic Objectives
The first step always begins with a plan. Define your strategic objectives by identifying what you are trying to accomplish. This involves talking through a goal, a mechanism for measurement of progress, and a threshold for success.
For example, if you are looking to pursue strategic acquisitions in order to be an early leader in cutting-edge technology, that is your goal. Perhaps you will use market share as a measurement and the top 3-5 competitors in the market as your benchmark.
Using this strategic objective, you can evaluate each opportunity through the lens of whether or not the deal will help you achieve market share growth to position your company as a leader in the new technology
2. Identify Your Target(s)
Once strategic objectives are established, the next step is to identify and screen potential acquisition targets. This process involves market research, industry analysis, and target profiling to identify companies that align with the buyer’s strategic vision.
Target identification criteria include:
- Financial Performance
- Market Position
- Growth Potential
- Cultural Fit
Many of our clients find this part of the journey to be quite tedious. It is important to remember that it takes time to find not only the right fit but also someone who is ready to sell. Your true target is a company that is a good fit for both.
3. Secure Financing
Financing an acquisition is about more than covering costs. It’s a decision that impacts the company’s long-term strategic goals. For example, financing an acquisition with debt can be a good way to ensure retained ownership in the company. But it comes with risk. Debt financing can strain cash flow, negatively impact the business’ credit score, and may also come with restrictive covenants that stand in the way of future strategic plans.
Buyside transactions are typically financed through a combination of funding sources, including:
- Cash: Simple, with no added costs for interest or financing but may reduce liquidity.
- Debt: Comes with tax benefits and the assurance of retained ownership, but may also come with restrictive covenants and a negative credit impact.
- Equity: Preserves cash reserves and does not increase debt, but will likely dilute ownership and add more complexity to the transaction.
Each type of financing has a distinct impact on the company’s liquidity and ownership structure. Choosing the right mix becomes a complex strategic decision by itself. The right advisory team can help you weigh the pros and cons so that you can choose the best situation for your strategic and long-term goals.
4. Conduct Due Diligence
Due diligence, or the thorough review of the financial and operational health of a company, is essential to mitigate risks and uncover deal-breakers before the transaction closes. This process typically looks at all key areas of the business, including:
- Finances
- Legal
- Operations
- Commercial
The goal of the due diligence process is to provide all parties involved with detailed information about the transaction. This helps everyone make informed decisions and manage risk tolerance. A specialized advisory team can often provide deeper insights with less bias.
Through diligence with one of our clients at Embarc Advisors, we discovered a drop in sales and marketing expenses which increased the bottom line. We ultimately had to drop the purchase price to reflect a normalized sales & marketing figure which was beneficial to our clients.
5. Valuation & Deal Structure
The valuation, or the process of determining the fair value of the target company is an imperative part of the M&A process. There are different methods of valuing a company, which may be more or less appropriate depending on the size and stage of the company and the purpose of the valuation.
For small to mid-sized businesses, valuation is often based on EBITDA (earnings before interest, tax, depreciation, and amortization). For growing businesses, the DCF (discounted cash flow) method may be more appropriate. And for high-value startups, precedent transactions can be a good way to add context in order to arrive at a fair valuation.
The valuation provides a starting point. The final sticker price of the deal will still be worked out in rounds of negotiations between the buyer and the seller. Part of that negotiation, or how much wiggle room a buyer or seller has, depends on the deal structure.
Deal structuring involves determining the payment terms, financing options, and potential earn-out arrangements to optimize value for both parties while minimizing risks. It is important to remember that the most recent transactions are the most relevant.
6. Negotiating from the Buyers Perspective
Negotiation is more of an art than a science because every deal is unique. Effective negotiation involves balancing the interests of both parties, addressing potential conflicts, and reaching mutually beneficial agreements on price, terms, and conditions.
Success in the negotiation stage requires:
- Understanding the Seller’s Motivations
- Application of Due Diligence Discovery
- Clearly Defining Your Limits–and Walk Away Point
- Clear, Respectful Communication
- Focus on a Win-Win Scenario
Once the terms are finalized, legal documentation, including the purchase agreement, is drafted and executed to formalize the transaction. A good advisory team can handle the communication throughout the negotiation process, ensuring that you are informed and intentional in your decision-making throughout the entire process.There are a lot of moving parts in any business deal, and it’s easy to overlook really important details like net working capital. Having a very thorough understanding of the financial mechanics behind net working capital can be worth millions of dollars. At Embarc, we have saved clients $1M+ by negotiating the appropriate net working capital peg.
7. Closing the Deal
You have a price and everyone agrees on it, that’s great. Your deal is moving forward, but you haven’t reached the finish line yet. Before closing, regulatory approvals and compliance requirements must be addressed to ensure legal and regulatory compliance.
Depending on the industry, compliance needs may be extensive. A small IT company may have a lot of checklist items for privacy, protection of data, and antitrust laws but minimal requirements for environmental regulations. The opposite might be true of a municipal utility company.
Once all conditions are met, the transaction is closed and ownership of the target company is transferred to the buyer but that’s still not the end. There’s one more step to successfully navigate the buyside M&A process.
8. Successfully Integrating a New Acquisition
Integration is often an afterthought, but it’s no less important. Without a plan for a successful transition, even high-potential acquisitions are likely to fail. Post-merger integration (PMI) can be a great tool to leverage anticipated synergies.
The process involves creating and executing a plan to integrate operations, systems, processes, and cultures in order to achieve a seamless transition from two separate companies to a single, cohesive entity.
Effective communication, strong leadership, and a plan for change management are all essential to navigate the final step of the buyside process and achieve the intended goals of the acquisition.
Embarc Advisors Can Help You Navigate the Buyside M&A Process with Confidence
In mergers and acquisitions, the deal process is lengthy. A typical transaction can span 6-12 months with any variety of unique factors radically changing the trajectory of the deal between the letter of intent and post-close integration.
The real value of working with a strong advisory team throughout the transaction is the agility and foresight that will become available to you as you navigate the unknowns and evolving deal conditions.
If acquisition-led growth is on your horizon, it’s never too early to engage an advisory team. Contact Embarc Advisors today.
