Everything You Want to Know About the Acquisition Process From Start to Finish
As your company grows, you may be considering acquisitions which offer many benefits, from introducing new services to expanding into new markets. However, acquisitions require much planning to be successful. There are many aspects to consider which all affect the end result of the acquisition.
In this article, we draw from our years of experience in sales and acquisition to share in-depth advice on the steps and factors involved in performing an acquisition.
Why Acquisitions?
Acquisitions are a great way to quickly (i) expand in existing markets, (ii) enter new geographical markets, (iii) add new end markets, (iv) add new products and services and/or (v) increase the value of a business.
Acquisitions Must Be A “Win-Win” for Both Parties
Acquisitions must be mutually beneficial for both parties in order to be successful. Both parties should spend time establishing complete trust with one another. Then, when it comes time to close the deal, both sides are very comfortable and have total confidence in the outcomes that both parties will deliver post-close.
Acquisitions Are an Extremely Emotional Process for the Seller
For sellers, their company is their baby. They have poured their blood, sweat and tears into their business and have worked hard 24/7/365 to build it. As such, buyers must have extreme empathy for a seller. Sellers need to know that buyers will continue to nurture, develop and grow the business they have spent their lives working for and that their legacy and their teams will be honored and very well taken care of.
How to Find Acquisition Opportunities
Many acquisition opportunities will come from a buyer’s existing network of industry contacts or via referrals based upon industry reputation. Otherwise, acquisitions can be found via investment bankers or business brokers. Acquisitions are often cultivated over many years spent building trust and rapport between buyer and seller.
Strategic vs. Opportunistic Acquisitions
Opportunistic acquisitions are those that are initiated by a seller seeking an exit or liquidity event. Strategic acquisitions require research and proactive outreach to initiate a transaction in a desired geography or market.
Local vs. New Market Acquisitions
Local acquisitions enable a buyer to consolidate and gain market share in their existing markets, but often times local sellers are much more guarded due to competitive sensitivities. Local acquisitions can be highly accretive and are often easier to execute and integrate. New geographic market acquisitions must have significant strategic value as they are more costly to execute and integrate and generally much more complex. More time and resources must go into the diligence, planning and execution of new market acquisitions to ensure their success. Despite their challenges, new market acquisitions are much faster and typically deliver higher return on time and investment than an organic “greenfield” approach to growing new markets.
Necessary Resources for Acquisitions
Acquisitions require a due diligence and transition team that is both experienced and qualified. This team includes members of a buyer’s strategic leadership team, operations leaders, department heads and third-party resources. Strong organization, planning and communication across the diligence and transition team are critical for successful acquisition execution.
Playbooks and Processes
Successful acquisitions require comprehensive and highly detailed playbooks and processes. These typically start with extensive question lists and data requests which a seller must satisfy in full after executing an NDA. Once all the necessary diligence requests are satisfied, it is up to the operations transition team to use the information gathered during diligence to develop and execute the integration plan and playbook which consists of numerous checklists for the various functional departments. This critical step in the acquisition process requires extreme coordination with a seller’s management team.
Valuations and Multiples
Valuations are as much an art as they are a science. There is no simple definitive formula for valuing a business. The same is true of multiples. Numerous variables are considered when valuing a business. Valuation often comes down to a buyer and seller finding a price that both sides are happy with, which always requires a significant amount of give and take. Company-specific factors and the situation and desires of the seller all affect valuation and earnings before interest, taxes, depreciation and amortization (EBITDA) multiple.
Addbacks and Adjustments
Addbacks and adjustments represent the expenses (or revenues in some cases) historically incurred by the business that will not continue after a transaction. These often include perks and expenses enjoyed by the owner like life insurance, car payments, travel and other personal expenses. The end result is what is known as a “normalized profit and loss (P&L)” which reflects the performance of the business on a go-forward basis.
What Affects Sale Price and Terms?
Numerous factors affect sale price and terms including:
- Profitability
- Number, type, size and market segment of customer accounts
- Customer concentration
- Strength of leadership team
- Continuity of leadership team post-close (is the seller exiting?)
- End markets
- Barriers to entry
- Customer contract terms and duration
- Customer retention
- Employee retention
- Historical and projected sales growth
Deal Terms
Specific deal terms vary depending on the situation of the seller and the buyer, but typical deals often include (i) cash at close, (ii) earnout or seller note and (iii) rollover or reinvestment by the seller into the buyer. Rollover or reinvestment is a great way for sellers to continue to benefit from the growth of both their business and that of the acquiring business. Often times, rollover investments end up being worth as much as or more than what a seller sold their business for originally. Earnouts are a way for sellers to increase the value they receive for their business by continuing to grow and outperform after a sale.
In Conclusion: Plan and Strategize
The decision to engage in acquisitions is not one that should be taken lightly. While acquisitions offer a myriad of benefits, from expanding market presence to adding new products and services, acquisitions are also inherently risky and, if not careful, can result in value destruction rather than expansion.
Navigating the acquisition process requires a strategic approach and a deep understanding of the nuances involved. Crucially, successful acquisitions hinge on establishing trust and ensuring mutual benefit for both parties. Sellers require empathy and reassurance that their legacy will be honored post-acquisition. Whether pursuing opportunistic or strategic acquisitions, meticulous planning, thorough due diligence and clear communication are essential. Moreover, crafting fair deal terms that accommodate the needs of both buyer and seller is paramount for a successful transaction. Ultimately, acquisitions represent a complex yet rewarding avenue for growth, where careful consideration and thoughtful execution can lead to long-term success for all involved parties.
At BSCAI’s Contracting Success 2023, Tim Murch led a session titled “Everything You Want to Know About the Acquisition Process from A to Z.” Stay tuned for more 2024 BSCAI events.
Tim M. Murch, CBSE, is CEO and managing partner of 4M Building Solutions, a 45-year-old janitorial services company with sales just under $200,000,000 operating in 26 states with 6,500 Team Members. Murch and 4M have successfully completed 32 acquisitions to date. 4M partnered with O2 Investment Partners the end of 2022, with 4M being the platform company leading acquisitions and further organic growth.
Andrew Rust is head of corporate development and M&A for 4M Building Solutions. Rust is an expert in acquiring and partnering with founder-owned businesses, having closed more than $690 million of transaction value in his career.