Punching Out – The Additive Process: Tips on How to Buy a Board Shop or Assembly House
One of the quickest ways to grow a business is to acquire another business. At the same time, acquiring a business can be risky, and a really bad deal may put your original business in jeopardy. Here are some tips on how to make acquisitions.
First Layer: Planning
It is important to decide if making an acquisition makes sense for your shop. A business owner should assemble and consult with a team, which should include:
1. Key executives: Current employees should be an intricate part of your team, as they will help with evaluating deals, integrating, and running the acquired business. It is good to have a second and third pair of eyes to help you in the process, to look for positives as well as pitfalls. The team should include finance, sales, operations, HR, IT, and R&D.
2. Legal: An attorney should be experienced in M&A, have enough depth to handle complicated deals, and have experts in environmental and employee matters. If your trusted attorney is a one-person shop, have him recommend outside experts who can help, and ask how they plan to handle the deal. You may wish to engage another firm to handle acquisitions.
3. CPA/Tax: Your accounting firm should have experience in M&A, and be able to assist in structuring and evaluating deals. You may wish to engage your CPA to assist with due diligence, or hire an outside financial advisor to perform that work.
4. Investment Banker: An experienced intermediary is critical for a successful acquisition program. They can help set up a program correctly, make calls while you run your business, act as a buffer between the two owners and their teams (and there can certainly be a lot of hurdles), and coordinate the entire process through to closing.
5. Other Experts: If you do not have an extensive internal team, some of the outside experts you can engage would be in the fields of HR, IT, insurance, PR, real estate, etc. At the same time, too many experts can bog down the process, so be sure to weigh the advantages of these experts vs. getting a deal done quickly.
The goals of the planning should be to make sure your company is ready to make an acquisition, to determine how to pay for it and how much you can afford, who will be responsible for what, how you want to conduct the program, and to put together the acquisition criteria and the target list.
Second Layer: Begin the Search
Now the hunt begins! Using an intermediary to make initial contact can be helpful, as they do this every day and you have a business to run. However, you may want to reach out to the owners that you already know, otherwise, they might wonder why you didn’t just call them up. Before contacting anyone, you should be able to answer why you are interested in an acquisition, how you will afford it, what the general parameters on valuation and terms will be, and what the next steps will be.
Typically, the first few calls are used to persuade the seller to go forward and to establish credibility. Business owners have all heard ‘I have an excellent buyer in your industry’ from brokers, or they have been involved in deals for months and months that did not go through for some reason, so many sellers are cautious. During this stage, we gather information, talk about basic strategy for the acquisition, discuss general terms, structure, and conditions, and arrange for calls and visits.
Third Layer: Making the Offer
Once enough information has been gathered to determine that there is a reasonable fit, that both sides are interested in going forward, and that the expectations of value are fairly close, it is good to for the buyer to memorialize these discussions by drafting an indication of interest (IOI), also called a non-binding offer. The IOI generally includes 1) the general strategy for the acquisition; 2) valuation and terms; 3) how the transaction will be financed; 4) any other major conditions, such as key management staying with the business, purchasing the building or leasing (or uprooting the business, if that’s the case). This document is usually 1–2 pages. If the seller accepts the offer, then typically the buyer drafts a more detailed Letter of Intent. At times, we can skip the IOI and go straight to a LOI if talks are going smoothly.
Fourth Layer: Due Diligence
The letter of intent typically includes an exclusivity clause for 60-90 days to complete due diligence and to draft the purchase agreement documents. A buyer should have the due diligence request list ready well before an LOI is signed, so that it can be delivered to the seller’s team as soon as the LOI is signed. The due diligence period is the time for the buyer’s team to go over the seller’s information, inspect the facility and equipment, speak with customers and suppliers, and meet with key employees. If any issues come up, it is important to bring them up quickly and to discuss fairly. Seller’s don’t like it if their baby is called ugly, so it is usually better if the teams handle the dirty work.
Fifth Layer: Closing the Deal
With each year, it seems that the paperwork and effort required to close deals keep increasing. The legal and accounting teams will kill several trees to produce the documentation necessary to close the deal and to make sure there are no misunderstandings afterwards. Be sure to document all conditions of the deal, such as transition services for the outgoing seller, NDAs and employment agreements for remaining key employees, contingent payments such as earn–outs, etc.
Sixth Layer: Integration
Once the deal is closed, then the real work starts! Integration planning should start before the acquisition program even begins, as it is important to know who will be responsible for what function. The buyer may have already contacted some customers, suppliers, and key employees, and it is important to communicate well with these stakeholders so that no value is lost.
Here are some other key points:
Don’t over–pay! While that sounds like common sense, you can buy a company for $1 and still over-pay. All failed deals basically come down to this key point, and often the problem is with the buyer and not the seller (not enough planning, poor integration, over-estimation of synergies, too much borrowing/leverage, etc.). Be sure to keep In touch with your deal team and advisors before, during, and after the deal, and never be afraid to walk away if a deal does not make sense.
Don’t Under-estimate the amount of effort needed: Just because a buyer has been a part of deals or read/heard about them, does not mean that the buyer is fully prepared to go through the process. The amount of effort and analysis required is a lot more than you see in the news. The closing Press Release may be 2-3 paragraphs long and include several positive quotes, but they never disclose that the deal took 12 months and endless conference calls to get over the finish line. Although that sounds daunting, proper planning and a good team can help make the process smoother.
Set Goals and Keep Things Moving: We all know that you have a business to run, and that makes it all the more important to set goals and time lines, and to keep the process moving. Once a process gets bogged down, either side can lose interest, a new buyer might come through the door and woo the seller, something might change with either business or in the markets, or any number of incidents may occur that will further delay or jeopardize the deal.
While every deal is different: some are plain-vanilla double-sided deals, while others have 48 layers with plenty of blind and buried vias, most deals follow a basic pattern. With enough planning and a proactive program, you too can grow your company through acquisitions.
Tom Kastner is the president of GP Ventures, a tech-focused M&A advisory firm.
