Ten Points That Contribute To a Successful Acquisition
1. Look for the right targets.
An acquirer is in the best position to offer competitive pricing when it can merge most, if not all, of the acquired business. This involves two separate/distinct valuation Issues – What is the target worth as a stand-alone entity? and, What is it worth to you, the acquirer? The difference is your negotiating space so, as an acquirer, you have to determine both numbers.
2. Keep in mind that both sides are selling something.
The seller is striving to put his best foot forward in order to get the best deal possible. While this involves “the price,” it almost always includes a number of issues of personal importance –items of equal, and occasionally even more important than, “the price.” So, listen and examine carefully.
As a buyer, you too are selling. Obviously you have strengths but the challenge is to identify and present those strengths that are important to the target. – Tailor your presentation to the specific target. What does he/she really want? Can you determine his/her “wish list” and respond to it?
3. NEVER ignore the Balance Sheet.
Even if you are “ONLY buying the target’s assets” do not ignore its balance sheet. The balance sheet of every privately held business can tell you a lot about the agency’s culture. Such things as the Owner’s style; special treatment of employees; his/her sales philosophy. For example; i) Do Accounts Receivable indicate that he is financing his major accounts? You want to know whoowes the agency not simply how much; ii) Can key employees borrow money for special needs often on favorable terms? Are you willing to continue these and other personnel practices?
4. Know what is in each account.
The format of all agency financial statements is somewhat similar. The substance can vary dramatically. You may know what is in each account in your agency but don’t presume that income and expense items appear similarly in your target’s statements. If you are going to develop an accurate assessment of both the stand-alone value of your target and your own expected benefits from acquisition and merger, you need to know what is in each account and how and when it gets posted there.
Once a deal is in sight, start planning for the post-closing period.
5. Many acquirers actually hurt their chances for success by not spending as much time on planning for the post-closing integration as on negotiating price and terms. Critical time and cost is involved in each of the following areas:
- Resolving differences in personnel practices especially compensation, titles and reporting relationships.
- Who, How and When will you contact Key accounts; all accounts?
- Who will lead the merging of all financial and operating data processing Systems?
6. Prior to the closing it is often important to initiate fulfilment of certain important requirements – particularly if the transaction is being structured as a purchase of assets. Will new non-competition /non-solicitation covenants be required? Will new contracts with markets be required? If several staff are to be terminated, who and when will this be accomplished?
Carefully consider the Terms of your deal not just the Price.
Strangely, many buyers and sellers are unaware of the significant differences among Value, Price and Terms. Understanding the differences can have a substantial effect on how the negotiations proceed, how the parties assess “fairness” and the ultimate benefits to all concerned.
7. Both the Acquirer and the Seller will have their opinion as to “Value.” To be successful in “selling” his opinion, it is important that an acquirer be able to support it based on an assessment of the seller’s financial and operating results. The more carefully this opinion has been developed the more respectful will be the seller’s response.
8. A fair price isn’t fair if the TERMS don’t fit the Buyer and the Seller.
Not only must the terms be fair there must be structures and covenants in place to provide assurance that all parties are required to comply. While many Covenants will be standard each transaction has its own nuances. It is critical that the covenants be specific to the issues of the transaction
The selection of experienced counsel – tax, legal and insurance is frequently critical to the success of a transaction.
9. Too often what appears be a fair price turns out to be a disappointment because of the tax structure of the transaction. Similarly, a well-conceived, contingent pricing structure can turn into a nightmare because counsel didn’t know the differences among revenues and commissions; base commissions and contingent commissions; P&C commissions compared to life insurance commissions.
10. Make it an important occasion.
The employees of both your agency and the acquired agency will have a wealth of questions and personal concerns. Be prepared. Don’t wait to meet with employees (yours and theirs); Key accounts; and, key markets.