Your step-by-step guide to making an acquisition

With the economy back on track for most sectors, many entrepreneurs are looking to fuel their company’s growth by making acquisitions in the post-pandemic period.

It’s potentially an excellent time to buy a business because many baby boom entrepreneurs are looking to sell their company and retire. In fact, our research indicates that one in four Canadian entrepreneurs wants to sell or close their business in the next five years. That should translate into more than 115,000 small and medium-sized businesses up for sale to outside buyers in that period.

An acquisition can accelerate your company’s growth in many ways:

• by boosting profitability
• by increasing market share
• by opening new markets
• by achieving increased productivity through economies of scale

Entrepreneurs are also increasingly looking to acquisitions as a way to add skilled workers in a time of labour shortages as well as gain access to technology and intellectual property.

It’s critical to follow an acquisition roadmap in preparing, executing and integrating your acquisition.

Your business acquisition roadmap

1. Preparing for an acquisition

An important first step in making an acquisition is to get into the right mindset about how long the process will take. A consistent comment we hear from entrepreneurs is that it took much longer to complete a transaction than they’d anticipated. From the moment you decide to pursue an acquisition strategy, you should expect it to take at least six months to close a deal, and often it will take longer.

To guide you, it’s important to develop an acquisition plan at the outset.

You can start by doing a deep dive with your management team into where your business stands currently.

• What are your strengths and weaknesses?
• What is the vision for the next few years?
• What are strategic objectives for an acquisition and how do to they fit into your vision?

A great way to conduct these discussions and validate options is through a strategic planning exercise.

In the initial stages of your acquisition planning, you also will want to assemble an internal team and line up external advisors who are highly experienced in the process of buying a business. Once you have your acquisition team and a plan in place, it’s time to start your search for a suitable target.

Be proactive in searching for a business

We find many entrepreneurs are too passive in their search for companies to buy. Indeed, our research indicates only 2% of buyers speak directly to sellers, one of best approaches to making an acquisition.

Contact the seller directly

There are many good companies for sale, but you will likely have to cast a wide net to find them. Get the word out to lawyers, accountants, bankers, business associates and friends. Then, approach potential targets directly.

You may want to approach a competitor. Admittedly, it can be touchy to discuss buying a competitor’s business. To put the best chances on your side, it’s a good idea to begin fostering trust and building a relationship with your competitor early. When you get serious about a possible sale, signing non-disclosure agreements will encourage frank discussions between you.

2. Initial and pre-sale negotiations

Before entering into negotiations with a potential target, you will obviously want to do as much research as you can on the company.

Clearly, one of your key disadvantages as the buyer is information asymmetry—you will never know as much about the target as the seller does about the business. Nevertheless, one of your key objectives should be to close the information gap as much as reasonably possible before completing the transaction.

At this early stage, you will explain why you are interested in the business and try to get information about the seller’s expectations in terms of a sale price. You should also seek some basic information about the company—sales, gross margin, earnings before interest, taxes, depreciation and amortization (EBITDA) and any other information you can get.

Understand your financing options

While you are seeking information about the target, it’s a good idea to also have a preliminary discussion with your banker about potential financing options. Most bankers will be open to examining what kind of a transaction is possible given your financial position. This will help you avoid negotiating a deal that you cannot finance—a situation that will not only be embarrassing but also damaging to your credibility.

Generally, both parties will want to sign a letter of intent before launching formal due diligence on the business. You should involve your advisors at this stage, including your lawyer, accountant, transaction advisor and lender. Although not a binding purchase offer, the letter of intent does tend to anchor the transaction terms to some degree.

At this point, you will also arrange financing. In most transactions there are three sources of funding—internal or outside equity, including existing cash on balance sheet, bank debt and vendor financing.

3. Due diligence and the purchase agreement

The next step is due diligence and negotiating the purchase agreement. This is where you must leave your emotions behind in favour of a hard-nosed, objective analysis of the business you want to buy.

Here, it’s essential to get your experienced team involved in studying the company. Among the key issues you will be looking at are:

• the company’s balance sheet and historical and projected earnings
• the management team in place
• the importance of the current owner to the business and his or her willingness to stay to help with the transition
• the company’s operations
• the cultural fit between the two companies

Coming out of the pandemic, it’s particularly important to get a fix on the sustainability of profits. The company’s earnings were likely distorted either to the high side or low side, depending on the fortunes of the business during the pandemic. What are its baseline earnings going forward?

Don’t scrimp on due diligence

The due diligence process is critical to the success of the acquisition and it’s therefore important to avoid cutting corners to save costs or meet transaction deadlines. It’s also crucial to resist the temptation to dismiss negative due diligence findings or rationalize them away in order to maintain your optimism about the deal.

In terms of sales price, a multiple of the EBITDA is usually the starting point, but many other factors will also come into play. These include the industry outlook, customer concentration, the predictability of cash flow and how systematized the business is—whether it can run without the current owner.

The last step to complete the transaction is to finalize the purchase agreement, making any necessary adjustments.

4. Post-merger integration

Once the deal has closed, you don’t get to rest. Indeed, how you integrate the new business into your existing one can make or break your company. You should have prepared a plan to guide you as you bring the companies together and named a person to be in charge of this process.

Integration takes time and it’s not always smooth sailing. Surprises are inevitable. You may need more money, time and/or people than expected. Building flexibility into your financing plan and thinking ahead of time about contingencies will help when the unexpected happens.

To help, BDC offers a post-merger integration checklist.

Don’t be afraid to reach out

And that’s it for the acquisition roadmap. We hope this article can help you get a handle on the basic steps that need to be completed to successfully buy a business.

You can get more information by downloading a copy of our latest study on business acquisitions. There are additional details in there about every step.

Lastly, I would invite you to reach out to start a conversation early on in your acquisition journey. We know it can be intimidating to get started with buying a business and will try to advise and support your all the way through.