The decision to purchase a business is a large one. There are several steps that, if followed, make the process of acquiring a company easier.
For nearly a decade, I advised organizations looking to acquire new assets in order to increase their scale, profitability and market competitiveness. During this time, I developed a key set of steps to effectively assess the viability of a target company for a potential acquisition.
This guide to buying a company encompasses what I learned during my time as a merger and acquisitions (M&A) advisor and can be a good roadmap for acquiring an asset to create value and expand your market reach. The following are the six concrete steps you should take when considering whether or not to purchase a company.
1. Develop your story.
Why are you seeking to acquire a company? What are your main goals of the acquisition? What type of transformation are you aiming to make within your organization? Answering these important questions is the first step of successfully buying a company.
You should understand and clearly map out the end goal and long-term vision of your organization to fuel your acquisition strategy and decisions. For example, are you seeking to buy a company to increase your supply chain control, enter a new territory or eliminate a competitor?
Develop the story of your acquisition and how it will fit into the larger goal of your organization and its future growth. Once you have this clear picture in mind, use it to drive the next five steps for buying a company.
2. Create search criteria.
After clearly defining why you seek to buy a company, it is vital to develop a set of search criteria based on the acquisition's goal. Search criteria should narrow down the type, size, industry, geography, etc. of the companies you would consider buying.
Developing these criteria will allow you to conduct a more strategic, targeted and efficient search. You should decide them based on your budget, goals and resources to make this seemingly arduous task go much more smoothly. Organize the search criteria on a centralized document that all decision-makers can access in order to align acquisition efforts and goals.
3. Do your research.
Once you find a select group of companies you would be interested in buying, it's essential to conduct preliminary research on each organization, its leadership, culture and business trends before taking any further steps. While conducting this research might seem like an obvious next step, many people may not know how to approach this process most effectively and efficiently.
One way to make the research process go smoothly is to access and make use of industry databases. There's a host of databases and software currently available that provide important insights on a company's revenue, market competition, growth rate, financing history and more. Databases such as PitchBook, CB Insights and S&P Global Market Intelligence are great resources. These databases will organize and provide the data you need in an efficient manner so that your acquisition process can move swiftly.
It's also important not to overlook the power of simple internet research. Google searches present essential information discerning a company's news, culture, industry insights and brand awareness. LinkedIn searches provide insight on the number and caliber of employees, including who the company's top executives are and how the hierarchical structure is set.
This research will not only allow for a stronger decision-making process, but will also enable you to more effectively negotiate deal terms and to execute integration strategies should the transaction proceed.
4. Perform effective outreach.
The next step in successfully buying a company is to conduct effective outreach to the organizations you are interested in. This simply means getting through to the company's key decision-makers and delivering a strong, clear pitch for an acquisition.
Effective outreach requires persistence, effort, and in-depth knowledge of your message and value proposition. Your outreach efforts will be most successful if you strategically select your channels for connecting with decision-makers, craft your message carefully, add a clear and concise value proposition, and follow up without exception.
Traditionally, most outreach is conducted by phone. However, if decision-makers from your target company are not responsive to this outreach and happen to be very active on other channels, such as LinkedIn, it may be best to form a connection directly through that platform. These observations are highly important.
Breaking through gatekeepers at a target company to discuss potential transactions is often a large challenge businesses face during outreach. How to best overcome this challenge was the topic of a recently published M&A Science interview.
5. Conduct introductory meetings.
Once you've broken through to key decision-makers at your target organization and they express interest in a potential acquisition, you will likely conduct some form of introductory meeting.
The first meeting between a potential buyer and seller is an incredibly important and telling part of the M&A process. This meeting, whether it is conducted in person or virtually, is an opportunity for both parties to express their goals and terms for the potential acquisition.
Assessing deal fit and building a strong rapport are the key goals of introductory meetings. Both organizations should understand the intentions and motivations of the other as well as their market and financial attractiveness, enabling better deal decisions and providing important context for negotiations. During this meeting, also assess how well your organizations will integrate with one another should the transaction proceed. For example, how well do your cultures and operations align? Come prepared with prior research, any questions you have and a clear message.
If the introductory meeting is successful, you may consider signing a letter of intent (LOI), a nonbinding document outlining deal interest, terms and timelines. Signing this document will often give you further access to the other organization's financial, operational and legal materials to better inform the potential acquisition.
6. Determine scaling opportunities.
Can the company you're considering purchasing scale with your own? Are there good opportunities for growth, or are there strong impediments? These are important questions to consider before making the final decision to buy a company.
Before entering the due diligence phase, consider what information you need from the other company to effectively measure how it will scale and integrate with your current organization. How will its culture, operations, finances and market scope align with your own?
Determining any integration roadblocks early in the process will allow you to work internally to prepare for day one, ideally leading to increased value creation and long-term deal success.
At this point, bring the acquisition decision back to the first step of this guide. Will buying this company result in the goals you've laid out and provide your organization with the best way forward?