How to: 11 steps to buy a company (the M&A process)

11 steps to buy a company (the M&A process)

There are 11 steps to buy a company, including the final post-acquisition step:

  1. The strategy phase.
  2. Market, sector and target company analysis.
  3. First contacts with the target company.
  4. The confidentiality agreement and the indicative bid.
  5. Target company management presentation.
  6. The formal bid.
  7. Due diligence.
  8. Final negotiation.
  9. Final bid.
  10. Closing and take over.
  11. Post-acquisition

There are differences the in the steps to buy a company. In most acquisition process each one of the mentioned steps are included, one way or another.

Let’s go through each of the steps to buy a company, one by one:

1. The strategy phase

Taking steps to buy a company is often, but not always, part of a strategy. Sometime an opportunity arrise but you shall of course buy a company as part of an overall strategy.

In my experience, corporate acquisitions are successful when they come out of strengths. Acquisitions often become a disaster when you acquire a company to cure something that you are not particularly good at.”

A few examples when a corporate acquisition may become part of a strategy:

  • Buying an existing footprint when entering a new market.
  • Add on acquisitions, e.g. products, specialized staffs or distribution units.

2. Market, sector and target company analysis

Most company’s making successful acquisitions start their steps to but a company with a market, sector and target company analysis. Usually, such analysis is a combination of an online search and desktop analysis combined with interviews with industry experts.

Knowing the market potential is key to be able to estimate future growth potential and the potential market share. We usually talk about the relevant and addressable market, which is smaller than the total market.

Identifying and understanding potential target company’s is also part of the initial steps to buy a company. Usually, we make a gross list of target companies from our target criterias, and then we discuss which to prioritize.

The hottest contender for a possible acquisition is analyzed more carefully. A business case including an indicative valuation and estimated financial forecast constitutes the go-ahead decision material.

3. Your first contact is when you initiate the steps to buy a company

At some point a first contact needs to be made. This is how you initiate your steps to but a company. This is how you find out if your analysis is correct and if there are common ground for a discussion.

Initially we talk about a business combination, even if we are a much larger company than the acquisition target. It will be a more positive dialogue than a pure take-over discussion. Focus will be on combined potential, market and operation synergies.

4. The confidentiality agreement and the indicative bid.

Assuming our initial contact and dialogue goes well we soon draft a simple 2 – 3-page confidentiality agreement. Such a confidentiality agreement is pretty standard in terms of content and phrasing and serve two purposes:

  1. Signing a confidentiality agreements signal that both parties are serious about a discussion.
  2. A confidentiality agreement gives certain comfort that our discussions are to be kept a secret.

Now is the time to make an indicative, non-binding bid for the target company. Based on what you have learned, this is how you start the more detailed discussion about a possible acquisition.

Usually, the indicative bid is also a 2 – 3-page letter with a proposal to acquire the company. The bid includes and indicate price for the company and a list of provisions what you understand the business to be about. A non-binding, subject to further discussion wording is also included.

You are now well into the steps to buy a company, but far from ready to close a deal.

5. One of the most important steps to buy a company is the management presentation

The next step is a management presentation, if the owner of the target company believes that your indicative bid is in the ballpark of an acceptable valuation.

The management presentation is your chance to have a full day to listen to, talk to and ask senior staff about their business. This is a critical moment. This is where rosy early discussions are being scrutinized.

Of all the steps to buy a company, now is your chance to:

  1. Listen to their view on their market, their business, their opportunities and their challenges.
  2. Ask questions and challenge the team in critical areas.
  3. Make an initial assessment of key individuals within the target company.

Remember that if you buy an owner lead company, the owner will most likely leave the business. In some case’s current owner remain as an advisor but in most cases he will leave the business.

It’s important that you assess how instrumental the owner is for the business. You need to assess the company dependency of the current owner. Such dependencies can be sales, supplier contacts, or certain product development skills.

6. The formal bid is and important step to buy a company

Subject to successful discussions so far, you come to the formal bid for the company. Of all the steps to buy a company, this is the step that makes most people nervous. Now it’s the time.

Financing needs to be secured and your list of key assumption upon which you base your bid ishall be listed. That list is your backdoor out should due diligence reveal any negative surprises.

 The offering letter includes the price as well and commonly, but not always, suggested next steps.

7. Due diligence

Assuming that your offer has been accepted, it’s now time for the due diligence. This is when you, or your hired auditor or due diligence experts, are allowed to read the seller’s confidential material.

The seller usually prepares a virtual data room in the cloud that consist of all key documents relevant for the business. Your team make an appraisal, an audit, of these documents to confirm all previous statements, sayings and assumptions.

Minor deviations shall be a basis for price reduction and major deviations shall allow you from walk away from your formal bid. These are terms that needs to be expressed upfront in your offering letter for the company.

8. Negotiation

The negotiation for the company starts day one. The most important negotiation steps to buy a company follow’s after the due diligence phase. Now is when you have all facts available. Well, as good as it can be prior to actually own the business.

9. Final bid

You hand in your final, confirmative bid when your due diligence is done and your final negotiations has ended. This is the moment when your final adjustments are made to your offer for the company.

Usually there are no more negotiations. Your final confirmative bid is either accepted or rejected.

10. Closing and take over is the end of all steps to but a company

The closing and take over step is when all formalities are finalized.

The share purchase agreement you have been negotiated is signed. All conditions precent are being fulfilled, e.g. permits or competition authority approvals. Payments are made.

11. Post-acquisition not to be forgotten

You are now the proud owner of a business you have just acquired.

You have planned in advance for how to integrate your new business into your company, how to introduce new co-workers. To make a 100-day plan on what to do and how to kick-start the new business relationship is great planning.

Successful serial-buyers of companies plan in advance. No time to lose. The fun part starts once the acquisition is finalized.

It’s important that you know the purpose for buying a company, in contrast to growing your business organically. Having said that, execution, knowing when to take tactical decisions and, not least, a thought-though integration plan is important.

Add-on acquisitions can be very effective to propel your business growth to the next level. Study and plan thoroughly and your acquisition will become successful. Good luck!

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