This 6-part blog series is based on our Acquisitions Approval Model. This week we examine the crucial stage of getting to know the target. This week in Part 3, we review our Phase 3 where an acquirer meets the target, builds a comprehensive picture of their business, and assesses the value of owning it. This phase starts with a communication plan based on your detailed knowledge of the target. You have prioritized this target above others and are ready to engage in a conversation with the owners. Assuming the target owners are willing to meet, we begin a dance of engagement covering many meetings to allow an assessment of the target and a stress test of your strategy. If conversations go well, this phase should end with an Investment Paper for your Board, that articulates the value to you and the supporting post-acquisition plan.
In many ways this phase of the process is where the action takes place. You can do as much desk research as you want but acquisitions are a contact sport. People buy people. Here are some common mistakes we’ve seen over the years:
- Contact with the target is rushed, leading to poor first impressions by the acquirer.
- A letter is written to the directors (who do not own shares) by an investment bank explaining a client would like to buy the business!
- The acquirer is arrogant in early meetings demonstrating a lack of respect for the achievements of the seller and overemphasizing the successes of the acquirer.
- The analysis of the target is too focused on the history of the target rather than building a picture of the target under the acquirer’s ownership.
- Despite the fact that the selling shareholders are overwhelmed by the process, the acquirer drives an unrealistic timetable leading to frustration and disappointment.
- Seller expectations on price are not discussed leading to a complete disconnect later in the process.
- The acquiring team lack operational expertise and fail to probe key issues that would uncover flaws in the deal strategy.
- The acquirer fails to sell the dream and tap into the seller’s vision of the next chapter.
- The opportunity is missed to share the acquirer’s insight of the trends in the sector and their impact.
- Dependency risks are not explored. For example, the business is too dependent on, legacy products, the two owners, the top four customers.
A Better Way
The selling of a business is an emotional affair. In the context of a private company with say three or four major shareholders, it is a huge decision to put your company in play. There’s no such thing as a contested takeover of a private company. The controlling shareholders can just say no. Therefore, all acquirers need to understand that they are on a charm offensive. When you are buying you are selling! You are selling a new chapter in the life of the selling shareholders and management team. That’s the backstory as you embark on this crucial stage of the process. We recommend adopting this approach:
- The initial approach should be to the majority shareholder (if shareholders have equal % holdings, choose the CEO). Use a communication planner to fine tune the script. Your approach should be framed around strategic alliances. Do your homework (as outlined in the previous blog post) and explain who you are and why you are reaching out. Demonstrate your knowledge of the target e.g. we have been very impressed with your recent customer wins, your recent industry awards, your white papers etc. etc.
- Assuming success in meeting the target, be clear on the objectives of every meeting. Don’t rush it. Focus on getting to know the shareholders/management. Take time to explain your strategic thinking about the alliance. Use the opportunity in the early meetings to show respect for what has been achieved.
- Tap into the seller’s dreams, drivers and priorities? Where would they like to take the business over the next five years?
- Build a picture as soon as possible of the post-acquisition strategy. Constantly validate how it will work as new information comes to light. Are your assumptions around processes, people, technology, customers, products and capex making sense?
- Acquisitions are for operators. Allow your operational experts to study the target data. What do they see in terms of risks and exposures?
- Consider sharing some of your information to obtain the equivalent information of the sellers. Everything is a negotiation. As an example of limited information, you may have to accept sales revenue numbers by customers without the names until later in the process. Another play on obtaining data, explain that full information allows a full assessment of value.
- In terms of valuation, we believe the psychology at play is very simple. Sellers aspire to price, buyers perceive value. Tease out of the seller their price aspirations.
- Be sensitive to the fact that the management team on the seller’s side is running the business with limited bandwidth. We talk about pace and space.
- At the start of every meeting always clarify the latest state of the business. Anything changed since we last met? The marketplace has no respect for an M&A timetable. Customer fire suppliers, staff leave, life goes on.
- Constantly communicate with your target owners and ensure they understand the timetable of events that are in motion.
In summary, by taking this approach the acquiring team is setting themselves up for success, minimizing risks and ensuring that the valuation takes into account both the short-term and the long-term perspective, considers the future potential of the target company and the industry it operates in.
TPP is buy-side investment banking reimagined. We seamlessly become an extension of your team and integrate at all levels to add deep mergers & acquisitions into your business.
Ian@TPPBoston to arrange a conversation.