9 factors to consider before making an acquisition
December 2, 2014
By Larry Grimes
W.B. Grimes & Co.
Is now the right time to increase my business by acquiring another newspaper? Many publishers are asking themselves this question, particularly in light of stagnant internal growth and the attractiveness of fueling growth by making strategic acquisitions. The following are practical points to consider:
1) Take time to get to know the seller. Often the most successful acquisitions result from the personal chemistry that has developed from an existing business relationship. It can make negotiations easier, simplify due diligence and provide a barometer for integration potential.
2) Decide whether to hire a broker. (See my article on Page 9.) The decision whether to hire a buy-side broker depends on your knowledge of the pricing of comparable companies in your industry, the analytical capabilities of your financial team, and your need for outside help in identifying and negotiating for the right target.
Brokers with direct pipelines into target companies can be valuable. And yes, your buyer rep should provide due diligence compilation and analysis support. Fees are usually negotiable and payable upon success. Careful attention should be given to engagement letters with exclusivity terms.
3) Don’t get swept away in an auction process. Sellers often conduct an auction that can cause a buyer to lose its discipline for the sake of winning. A smart buyer sets its price parameters based on its own analysis of the target’s market and prospects, and how the combined businesses will match up. Sometimes the best deal decision is to pass.
4) Pick the right inside deal leader. Although acquisitions might begin with a discreet dinner between chief executive officers, a busy CEO is often not the best management point person for the deal. The deal leader should be a person who can tolerate legal and financial detail, is even tempered and can establish clear lines of responsibility.
5) Make sure your letter of intent is non-binding, except for binding “no-shop” provisions. A letter of intent helps identify key business points and demonstrates to financing sources that the deal is real. Make sure that it is not a binding commitment to complete the purchase without the customary buyer protections found in a final purchase and sale agreement. There should be a binding commitment by the seller to not use your offer to shop for a better deal elsewhere.
6) Measure pre-closing operations objectively. It is not enough to provide in the acquisition agreement that the target will be run in the ordinary course of business between the signing of the agreement and closing. Objective measures, such as seller having a specified net worth or working capital at closing, provide clear protection for the buyer and help avoid disputes.
7) Fair earn-outs can be the solution. If you can’t agree on price, consider an earn-out that entitles the seller to deferred payments if the target performs as advertised. Earn-out provisions are heavily negotiated and can dictate how the acquired business must be run and what happens if it is sold or shelved during the earn-out period.
8) Remember to take care of your most important asset: people. Successful buyers often enlist the early support and confidence of seller’s management. Private buyers frequently use creative bonus arrangements, rather than equity, to entice target’s management, given the illiquid nature of their stock. For the rank-and-file, a skilled human resources manager can send a reassuring signal by carefully planning a seamless transition of benefits.
9) Begin integration planning early. Post-transaction integration teams with representatives from both companies should begin the integration of products and technology, information systems operations, and employee benefits early in the process. The success of this effort will often determine whether the revenue enhancements and cost savings that prompted the transaction will be realized. © Larry Grimes 2014
W.B. Grimes & Co. offers a suite of buyer’s services designed to help you identify, pursue and conduct comprehensive due diligence and acquire target properties. For more information, contact Larry Grimes, president at 301-253-5016.