Acquisition 101
The success or failure of a business acquisition, or merger, all comes down to one critical component: due diligence. There are several reasons you may be considering a business acquisition; you prefer to acquire an existing business as opposed to starting your own, you wish to increase your market share, you’d like to tap an unassociated market, or even if you’d like to expand your business offerings without starting from scratch. For instance, if you have a brick and mortar retail business, and you’d like to start providing your suppliers with in-store traffic analytics, you may consider acquiring an existing SAAS (Software As A Service) company with that capability readily available instead of building a solution internally. Regardless of your reasoning, the initial steps and scope are the same; due diligence, due diligence, due diligence.
As with any new business, an acquisition should start with the foundational business development. Step one in your due diligence, and perhaps the most important step, is to determine whether the acquisition is a cultural and strategic fit. In other words, does this business align with your culture, and your present and future strategies? When you are in the consideration phase of an acquisition, this stems from your need and reasoning for the acquisition. It is important to distinguish the difference between your need(s) and what constitutes the best match to those needs. For example, if you decide to acquire a logistics company instead of starting your own, the need is a logistics company, not a specific logistics company. If one company doesn’t align with your culture or strategy, they are not the best match for your need(s). It is okay to shop and find someone that aligns with YOU.
Assuming you have now established the best cultural and strategic match, the next step is to execute the business foundational tasks. These tasks include such tools as: a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis, brand analysis, industry and market analysis, and overall business planning. It is important to execute these foundational steps for your potential acquisition as you would for any new business, because to you, it is in fact a new business. In order to educate yourself on the entirety of the acquisition, you must start at the beginning. These business foundational tools will provide you with yet another layer of crucial information that will aid your decision and influence your negotiation process.
Once these critical foundational components have all been executed, it is time to proceed to the detailed portion of the due diligence process. Depending on the size of your business, and the business being considered for acquisition, you will explore a number of data points during this process. Regardless of the size of your business, you will start out with six high-level considerations to be explored during your due diligence. Below we will provide each consideration with a brief explanation, helpful questions to ask, and tools to utilize. While this is by no means a complete set of considerations to address during your due diligence process, it will serve as a starting point for any acquisition.
Financial Standing; determine if the business in question is profitable, breaking even, or not profitable.
Request copies of the last three years of P&L (Profit & Loss) statements to determine the trajectory of the business’ financial standing.
How often are the financial statements internally audited? What are the results?
Are the business margins growing or deteriorating?
Does the business utilize forecasting? How accurate are the numbers?
Does the business have a healthy run rate?
Is the business in debt? Is the debt in good standing? Has the debt been considered in the scope of the acquisition?
Are there any unusual or extreme accounts receivable aging occurrences? Are they recurring?
Has the business consistently and accurately filed their taxes? Are there any IRS issues or other tax related red flags?
Intellectual Property; determine the compatibility and viability of the IP owned by the business in question.
What patents, trademarks, license agreements, and/or copyrights does the business have?
Is all of the IP protected according to the governing agency? Are there any exceptions to be considered?
Does any of the IP classify as a “trade-secret”? Are Non-Disclosure Agreements (NDA’s) in place accordingly?
Is / has the business been involved in any IP infringement litigation? Does the business exercise infringement litigation?
Sales and/or Book of Business; determine the health of the existing book of business and sales pipeline of the business in question.
What are the top ten revenue streams identified in the sales pipeline?
Who are the top twenty-five customers, and their primary services/products?
Will the existing book of business and sales pipeline be included in the acquisition? Are there any foreseen risks associated with this transition?
What is the customer satisfaction rate? Retention rate?
Are there any active waitlists / backlogs of customers? What are the reasons? What solutions are already in place?
What are the current terms and conditions of sales? What are the current policies and procedures of sales? Are there any issues?
How is the sales team compensated? How are they incentivized?
What are the seasonal trends of sales? Are any of the trends business critical?
Existing Partnerships / Contracts / Agreements; determine if the business in question has any active/ongoing agreements, and ensure results are included in the scope of the acquisition.
Does the business have any open lines of credit or loans? What are the terms and conditions, and remaining balance? Who will be responsible for the remaining balance?
What supplier, vendor, and/or manufacturer agreements does the business have? What are the terms and conditions? Will these agreements carry over, or require renegotiation?
Does the business have any past acquisition agreements? Are any of them still active? Do they require renegotiation?
Does the business have any settlement, indemnification, exclusivity, non-compete, or regional restriction agreements? What are the terms and conditions? Will these agreements carry over, or require renegotiation?
Are there any powers of attorney, franchise, real estate, union, or equity finance agreements to consider? What are the terms and conditions? Will these agreements carry over, or require renegotiation?
Compliance and Regulation; determine if the business in question is compliant with any governing and/or regulatory agencies. This will dramatically depend on the industry and business sector of the business in question.
It is imperative to review any compliance and/or regulatory entity requirements and terms in detail at this step. Once you have determined the governing or regulatory entity of the business, you will need to reach out to that entity directly for a comprehensive set of instructions and information.
Are there any antitrust issues that need to be addressed?
Does the business belong to a regulated industry that requires regulator approval for an acquisition? What are the regulatory steps that must be taken?
Has the business incurred any compliance and/or regulatory investigations and/or violations? Are any of the investigations and/or violations currently active? Are there any violations that have not been resolved?
Internal Standing; determine the health of the internal structure, employees, and production/performance of the business in question.
Request copies of the past three years of compensation paid to officers, management, and key team members, detailed by compensation type per pay period.
Request copies of manufacturing and/or productivity reports for the previous two years, by product/service. In addition, request copies of inventory reports for the same specifications.
Does the business have a clearly documented organizational chart and hierarchy flow?
Has the business incurred any labor disputes? Were they resolved properly? Are any disputes still active?
Do all employees and/or contractors have proper employment agreements in place? What are the terms and conditions of these agreements?
Does the business have employee manuals, processes, and policies in place? Are they comprehensive and up to date?
Does the business provide any additional forms of compensation; sick time, PTO, severance, relocation assistance, health benefits, tuition reimbursement, worker’s compensation, etc.? What are the terms and conditions of each compensation type?
Are the current employees aware of the acquisition? How many employees will be retained during the acquisition? How many will not?
Does the business have their Research & Development (R&D) process documented? Any other documentation and/or agreements relating to R&D?
What are the mandatory supplies and/or materials required to manufacture and/or provide products/services of the business in question?
By addressing the foundational considerations and tools, as well as the six high-level considerations we just reviewed, you will start to piece together a big picture view of the business you are considering for acquisition and how it matches with your needs. Again, this list of high-level considerations is by no means exhaustive. However, if you make it through all of the checkpoints listed above, you’re in great shape for the rest of your journey. If there’s something you don’t know, the best practice is to find out. Just keep your top priority at the forefront of your mind; due diligence, due diligence, due diligence. After all, the more you know, the more you grow.
When you’re ready to take the next step, we’re here for you.
