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Advisors, Private Equity

Negotiate Smarter Acquisitions With This Clever Strategy

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Acquisitions involve capitalizing on the synergistic aspects of a business to achieve growth, but often a portion of the target’s assets are not additive to that goal. These non-strategic assets fall into many categories but what they all have in common is the drag they put on the deal. Possibilities include:

  • Underperforming location(s) or product lines
  • Redundant locations or operations
  • Non-core business segments

There are a variety of strategies for handling this situation. Acquirers may “buy and sell” surplus, aged, or unusable assets — meaning that the acquisition of the entire company is quickly followed by the sale of unwanted assets. Or the acquirer may choose to “buy and hold,” taking a more measured approach to evaluating which assets should be divested.

But both of these options require financing the entire purchase of the business at the time of closing, tying up crucial capital in a sub-optimal investment, and imparting additional risk. This is not the ideal situation for the buyer or the lender(s) who may be involved in the transaction. However, acquirers who can identify up front exactly which assets they are not interested in investing in are well positioned to structure a deal in which they come to the table with less cash and more negotiating power.

Here’s how.

Bifurcate Before You Buy

By bifurcating the offer, buyers seize the opportunity to invest their time and money into only the most accretive parts of their business strategy. But to remain competitive, acquirers should consider bringing in a strategic partner willing to acquire unwanted assets at closing. By doing this, the buyer sheds risks and frees itself of the responsibility for disposing of surplus assets.

In a recent example, an acquirer decreased the amount it brought to the table by more than one-half by arranging for our firm’s Commercial & Industrial division to purchase a significant number of non-strategic assets that would have otherwise been headed for auction post-acquisition. The deal structure was compelling to the seller, who was offered an attractive price for the entire grouping of assets. It also better positioned the acquirer for success. Rather than diverting time and resources towards figuring out how to dispose of the excess equipment, the company instead focused its money and resources on making the integration successful.

A Winning Strategy for Lenders

Buyers are not the only ones to benefit from this strategy. In the example above, the lender financing the transaction also won by significantly mitigating its risk and ensuring the investment was used to grow core parts of its client’s business rather than capitalizing riskier, non-strategic assets. It also strengthened the service platform marketed by its client, improving the performance of and relationship with its portfolio company.

Strategic partners can come from unlikely places. In the earlier example, the buyer was introduced to the ultimate deal partner by the appraiser who had previously valued the assets being acquired. It may not always be evident until after the acquisition which assets will be shed, but in instances where it is known, significant money can be saved and risk mitigated by involving a partner with the ability and financial strength to acquire non-strategic assets at close. Acquirers of businesses should consider how a “bifurcate before you buy” strategy can improve their financial position and the risk profile of their next deal.

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