Paul Holohan of Richmond Capital Partners, the print and packaging mergers and acquisitions specialists, gives his experience of the route to a successful merger or acquisition.
Mergers and acquisitions can be a highly effective and economical way of growing a business. It is a path successfully trodden by many who, as a result, have now greatly increased their businesses and their profits.
To achieve success, it is vital to ensure that the proposal for a merger or acquisition is the right way forward for the business. However, it is no panacea, and it should be noted that the wrong decision could even create problems for an existing healthy business. We need look no further than the highly publicised problems experienced with the Co-op/Britannia and RBoS/ABN Amro acquisitions.
The big question is how to minimise the risks. Following these guidelines can help you to make the correct strategic decisions to grow through acquisitions.
Business review
The first step is to conduct an overall strategic review of your business and the options available to develop it. A MOST analysis will help you to identify where you intend to take the business (Mission), the goals to help achieve this (Objectives), the options to deliver these objectives (Strategies) and the action plan itself (Tactics). Once implemented, all actions should be regularly reviewed to ensure that they do not deviate from the plan without specific reasons. The action plan should clearly define time scales, responsibilities, monitoring and control procedures etc, to ensure the programme continues at the required pace.
Only when a firm and viable plan has been developed should the process move forward to actually looking for an acquisition. Avoid letting the proposed acquisition overshadow your responsibilities to the existing business. It is highly advisable to use a professional advisor who knows all the steps to take, and who is experienced in the industry with good contacts. The relationship with your advisor is key as trust, ethics and mutual respect are vital characteristics of the good chemistry essential to ensure a successful outcome.
Target identification
It is now time to identify acquisition targets, and here one piece of advice is to identify prime targets before they come up for sale. It is unlikely that the best candidates will be on the market. Then be proactive by creating opportunities for yourself. Do not publicise that you are looking as this could waste a lot of time once news gets around. Keep out of the limelight and use your advisor to make approaches stealthily and discreetly, using their specific industry knowledge and resources.
Get your advisor to make initial approaches, in confidence, to establish that you are a serious player and that the target business owner is serious about selling or merging with you.
Conduct an initial review of the business to ensure that it does match your expectations. Gain as much information on the targets as you can at this stage, using your own and your advisor’s knowledge, information provided by the target, independent research, trade associations and marketing material. Remain below the surface, as any leak may well damage your chances, potentially bringing out rival bidders and/or raising the price.
Obtain price expectations and a justification for this, undertake a valuation of the business through your advisors, establish the day to day involvement of the owners, look into recent developments and investments, management accounts and property valuations. This will establish whether the target offers what you want at the price you are prepared to pay. Do not be tempted to proceed if the company does not live up to the proposed fit and value. Ensure that all the decision makers are on board with the proposals so that problems do not occur further down the track.
Make an offer
Now that we have established the suitability of the target (and only now) it is time to come out of the shadows and make an offer. Here, it is especially important to make sure you communicate the offer in the right way, as you may only get the one opportunity. Using your specialist advisor, who has seen it all before, allows you to use him as a foil, without affecting any personal relationship you may go on to form.
The offer should contain how much the business is worth to you and how you will continue to improve the business by adding value. Your valuation will need to be somewhere in the same region as the owner’s valuation, although this is invariably a higher figure. Establish what is the most you will be willing to pay, and how it will be paid, for example cash, deferred payments, earn-out etc.
Identify the key people to be retained and some idea of the future which you intend to offer. Having formulated the offer, leave it to your advisor, keeping a degree of distance between yourselves and negotiations, in order to prevent this from becoming a personal issue.
There will invariably be negotiations on a greater or lesser number of issues, depending on the accuracy of your assessment, valuation and future plans.
Heads of Agreement
Having hopefully come to an agreement, it is now time to move into the more detailed legal procedure. This commences with a Heads of Agreement, which is a written agreement summarising the principle terms of the offer between the two parties. It will need to include the price to be paid and how, what will be acquired (ie shares and assets), and what will not be acquired, plus the setting of an exclusivity period. This ‘lockout’ is important, as you and your funders are likely now to be incurring significant time, effort and cost to deliver the offer. It prevents the owner negotiating with or selling to someone else during this period.
Heads of Agreement, however, is not a legally binding agreement. It seeks to detail the commercial aspects of the offer, to simplify the forthcoming process, and to prevent disputes or limit renegotiations. When completed, these Heads of Agreements can be signed up to and the next stage of the formal acquisition can now take place.
Due diligence
It is now time to take a much closer look at the company. Due diligence is the investigation into the financial and operational activities of the business and should include all key areas: financial and tax matters, commercial aspects, legal aspects, property issues, environmental issues, health and safety matters, information technology aspects and pension issues.
The due diligence is typically carried out by accountants, lawyers or specialist experts such as environment consultants or pension actuaries. Again, we strongly recommend that commercial due diligence (which is rarely carried out by lawyers or accountants) is performed by yourself with the support of advisors who have a specialist print industry background.
Due diligence can easily be under rated. It is vital to the process. For your own peace of mind, you should make thorough investigations and not rely on accountants/lawyers to uncover problem issues. It is your money that is at risk if you get it wrong and it is time and effort well spent to undertake a thorough and robust due diligence to minimise the likelihood of unforeseen problems.
Going through with it
It is only now that you are actually going to buy the business. You have carried out all the investigations you can, and now have a very detailed understanding of the target business. Following due diligence you are now either comfortable with the deal as agreed, or you need to renegotiate some of the principle terms based on the findings of due diligence. If there are no significant issues arising, it is time to proceed to the Legal Agreement, which will reflect the Heads of Agreement previously produced. If there are issues arising, these will need to be addressed – preferably by you or your advisor, with renegotiations where necessary. The experience of your advisors will make all the difference as to whether this can be satisfactorily achieved, whilst preserving the relationship between the buyer and seller. Do not be afraid to walk away if these issues cannot be successfully renegotiated.
Success!
All is signed and sealed and you have successfully acquired a business. Job done.
No.Remember why you bought the company and what you plan to do with it. Now you have secured the deal and acquired a new business, it is time to put into practice the plan you had. It is a new phase with fresh challenges. There are different cultures between the two companies to integrate. New strengths and weaknesses will come to light and a reappraisal of the business and its plans for the future needs to be undertaken quickly and efficiently. You must have a ‘First 100 Days Implementation Plan’!
Some of the issues for post-acquisition planning will include financial reporting methods, handling of the announcement and publicity of the acquisition, securing supportive employees, understanding how competition will react to your acquisition, and how customers and suppliers will react. How will your plans for the new business be communicated to all stakeholders?
And one final thought, now that you have successfully integrated with the new business and everything is working successfully: is now the time to consider your next acquisition? Good luck.
