Acquisition Decision and Target Selection

1. Develop a winning strategy: You should work with an experienced investment banker to develop a winning strategy based on the strategic direction of your company and the primary drivers of your decision to acquire another company.

2. Define your acquisition criteria: You and your investment banker will work together to clearly define the essential criteria for the acquisition, i.e., size, price, industry, geography, profitability, product portfolio, etc.

3. The “long list”: Your banker will work with you to create a list of target companies based on your acquisition criteria. Ask many questions about why your banker recommends certain companies over others. Moreover, discuss your concerns, if you have any before you finalize the long list and approach targeted companies.

a. The long list should contain information about these proposed target companies, including business models, sales, profitability, customer portfolio, technologies, and a short business description.

b. Keep in mind that your M&A deal should create value. Therefore, your banker should present you with a list of companies that will enhance your distinctive capabilities, leverage them, or allow you to develop new capabilities that will provide a sustainable competitive advantage.

4. The “short list”: Once you review the long list with your banker, you will work with them to finalize the list of target companies. The short list consists of the companies your banker will actively target and begin to engage with to locate the company that will provide you with the most lucrative and beneficial deal.

Contact and Negotiation

1. Contacting Potential Targets: Your banker will engage potential target companies by presenting information about your company, strategic acquisition objectives, and how the seller will benefit from the sale.

2. Confidentiality Agreement: Before you enter into any negotiations, your banker will draft a confidentiality agreement that the proposed target must sign to enable in-depth discussions and exchange of private company information.

3. Initial Valuation and Negotiation: Your banker will initiate negotiations by requesting an initial valuation from the proposed target company’s investment banker. Additionally, your banker should request the CIM (confidential information memorandum). Many sellers’ investment bankers will attempt to create a competitive bidding process, so your banker should be prepared by developing their valuation of the target company before negotiation.

a. Valuation Methods: Your banker will use one or more of the following methods to arrive at an initial valuation for the target company:

(a) discounted cash flow method

(b) comparable public companies analysis

(c) precedent M&A transactions analysis

(d) leverage buyout analysis

(e) underlying asset value analysis.

Preliminary Due Diligence

1. Due Diligence: This step of the M&A process aims to understand the target company in more detail. The first phase of the due diligence process is meant to provide more specific details about the target company’s financial statements and forecasts. This step is vital to not overcommitting time and resources on a potential target company that does not meet your pre-determined acquisition criteria.

a. Your banker should analyze and discuss any negative trends in the target’s earnings, growth potential, pending litigation or potential legal issues, competitive position, management, employee retention and turnover, customer concentration and retention, and any information that provides the ability to assess ‘fit’ between your company and the existing target company’s organizational culture.

2. IOI and Bid Date: If you and your banker decide that the target company would create value for your organization and you would like to move forward with negotiations, then your banker will submit a non-binding Indication of Interest letter (IOI). This letter outlines your intention to purchase the target firm. The target firm, or their investment banker, will respond with a bid date or request a specific bid.

Due Diligence and Letter of Intent

1. Further Diligence: The target company will respond to your IOI to let your banker know if they want to move forward with a deal. If so, you will be invited to meet with the target’s management team, and your banker will begin a much more intensive due diligence process. As a result, you and your banker will receive a large amount of information about the target company, including financial, legal, tax, and other requested information. Your banker should drive this process and create a comprehensive list of documents and data that will help you make the most informed buying decision.

2. Letter of Intent (LOI): If you and your banker still want to pursue a sale after all due diligence, then your banker will submit a letter of intent (LOI). You have a pre-determined time frame set by the seller to finish your due diligence and submit the letter of intent.

Financing

1. Secure Financing: Your banker must secure financing to assure the target company that you have the capital or access to funding to finalize the deal.

a. Types of Funding: Depending on your unique situation, your company may use traditional financing in the form of senior or subordinated debt, cash or cash equivalents, seller financing, or earn-out.

Definitive Agreement

1. Definitive Agreement: While you and your banker are arranging financing, your legal counsel should draft the definitive agreement, a comprehensive and legal document that details all aspects of the acquisition. The definitive agreement should contain the purchase price and all agreed-upon terms. This agreement is then sent to the seller’s investment banker for a final signature.

a. Negotiations: Purchase price negotiations after the definitive agreement is sent are rare. More often, you and the seller may continue negotiating the finer elements of the definitive purchase agreement.

Close the Transaction

1. After all parties sign the definitive purchase agreement, your banker will execute the agreement, send the funds, and close the transaction.