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Home > Mergers and Acquisitions Checklists > Planning the Acquisition Process

Mergers and Acquisitions Checklists

Planning the Acquisition Process


Checklist Description

This checklist outlines ways to help understand what buyer must do to prepare for an acquisition of a business.

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Definition

After a buyer decides to acquire a business, the process starts with the search for a suitable business. The targeted business could be known to the buyer or could be a competitor of the buyer. It could also be advertised for sale in a trade journal or newspaper, or the buyer could be approached directly by the seller or its intermediary.

After finding a business, the buyer must assess its value in order to establish the best offer price. If the business to be acquired is part of a company, it will have to file yearly accounts, which are of public record.

Every business is affected by cash flow, profit and loss, and how its finances are run. The balance sheet and accounts will give a good indication of all these elements. A buyer should also look at: the overall market within which the targeted business operates; the business’s performance and reputation; its competitors; and any other interested buyers. Another element to look at is the legislation in the country where the business operates. The logistics of acquiring a national business and an international business can be very different. A buyer should obtain information on the management of the targeted business. If a business is well managed, it is usually successful and well reputed. The buyer should also consider the workforce.

The buyer should consider the advantages the acquisition will have upon its own business and should start planning how it will be integrated within its own company.

In order to consider the purchase more thoroughly, more detailed investigations should be made. During this process, the buyer may well like to involve advisers who will provide a more thorough and objective valuation. However, this assistance may be expensive.

This investigation should give a buyer an idea of the value of the business and of the offer to make to the seller. The initial information will be verified by the later due diligence process, which takes place with the permission and cooperation of the seller. The buyer will approach the seller either directly or via its advisers and make an offer for the business. Negotiations on the price will usually commence, with the buyer and seller subsequently signing a document called heads of term. This will deal with the main points of the acquisition, such as price, warranties to be given by the seller and other essential conditions. The buyer and its advisers will have to sign a confidentiality agreement, which will protect the data disclosed by the seller and will give the buyer access to more detailed information from the seller’s private records. The due diligence process can last a few weeks, depending on the amount and complexity of the information to be investigated. The buyer will look in detail at all the business’s contracts with clients and suppliers, insurance, employees’ records, any intellectual property and IT issues, and any existent litigation. A buyer should also look at the business premises, any licenses, and environmental issues. Separately, the buyer’s accountants will investigate the financial details of the business. At the end of the due diligence process, the buyer will usually receive a legal due diligence report from its lawyers and a financial due diligence report from its accountants. These, together with the buyer’s own commercial and business assessment, will provide a very clear picture of the business and will allow the buyer to decide whether the acquisition is worth making or not.

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Advantages

A well-informed and prepared buyer:

  • Will be in a better position to decide whether the target business is worth buying in the first place.

  • Will be able to decide on an accurate valuation of the business and make a competitive offer price.

  • Will have a thorough understanding of the business to be sold and will, therefore, be able to conduct more advantageous negotiations.

  • Will be better able to help in running and integration of the business once the acquisition is made.

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Disadvantages

  • Initial investigations and later due diligence could be costly, and may show that the business is not worth acquiring.

  • An acquisition involves huge effort and a concentration of resources, which sometimes could be used to improve its own business.

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Action Checklist

  • Consider carefully any business you might acquire. Obtain as much information from as many sources as you can before committing to an expensive due diligence process.

  • Know your market and make sure that you have analyzed the consequences for your own business of the acquisition of another.

  • Be prepared for a long and complicated due diligence process, taking time and being costly.

  • Economize by negotiating a reasonable rate with your legal and financial advisers, but remember that it is better to incur costs by conducting a thorough investigation than to accept service that may fail to reveal potentially costly liabilities.

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Dos and Don’ts

Do

  • Involve your solicitors and accountants in the evaluation of both the risks and potential benefits of an acquisition, as well as in the due diligence process.

  • Negotiate your rates and make a contingency plan for any cost overrun.

  • Plan carefully the integration of the new business within your own.

Don’t

  • Don’t make the mistake of being attracted by a business that has not been thoroughly investigated.

  • Don’t overlook the importance of negotiating complex warranties and indemnities that would protect you in the event that underlying liabilities are discovered.

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Further reading

Book:

  • Dewhurst, John. Buying a Company: The Keys to Successful Acquisition. London: Bloomsbury Publishing, 1997.

Article:

  • Rowan-Robinson, Jeremy, and Norman Hutchinson. “Compensation for the compulsory acquisition of business interests: Satisfaction or sacrifice.” Journal of Property Valuation and Investment 13:1 (1995): 44–65. Online at: dx.doi.org/10.1108/14635789510077287

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