Research suggests that buyers often must evaluate more than 80 companies for each investment they make. The extreme shape of this “conversion funnel” in the M&A business looks unlike nearly any other more traditional sales funnel. It has caused professional financial and strategic buyers to develop structured and calculated processes by which to source, evaluate, and acquire companies. Without the resources, brand reach, reputation and synergies of a large corporation, you need to be even more effective in your sourcing strategy. You can’t just say that you’re with Boeing or Caterpillar or 3M, because you’re not.
Here are 3 key questions you must ask yourself / have a strategy around / have an answer for if you want to be successful at acquiring a private lower middle market company (revenues and EBITDA between 10M and 100M and 1M and 10M, respectively).
What is my Investment Thesis?
It goes without saying, but preparation BEFORE buying a company is crucial. This is the first step in ensuring that you’re focused in your search, and ultimately buy the right company. Take the time to develop your investment thesis. You want to ask yourself, “What type of business do you see yourself running? What are your strengths, and where are you going to have the most impact within the organization? And as a result, what competencies will you need to acquire? Are you interested in an industry where you can leverage your experience and network to grow the business? Where do you have an unfair advantage which you can leverage?”
What resources will I need?
Once you’ve narrowed your focus, engaging with M&A Advisors can help you manage the M&A process. Experienced advisors will walk you through the complex and time consuming process of finding a business, evaluating the opportunity, and negotiate with the seller. Some of the questions you may want to ask a potential advisor are, “How many M&A transactions have you closed? What type and size transactions have you completed in this industry? And, what industries do you have experience in?”
Assuming you have an M&A Advisor in your corner, you’ll want to understand how they’ve typically structured previous deals? Your advisor’s experience here can make or break a deal. Deciding how much cash to put down, how much the current owner can finance, post-transaction liabilities, etc. Advisors will help you navigate through the negotiation process, but you’ll also want a dedicated M&A attorney to advise you on many of the issues surrounding the acquisition of a company.
How do I find companies for sale?
Tactics range from conferences and cold calling to M&A technology and deal sourcing platforms. Depending on how niche your acquisition focus will be, understanding what tactics to use will set expectations around how much time it will take to find the company, the level of sophistication of your origination strategy, and the expenses required throughout the discovery process.
When evaluating potential acquisition opportunities, you will want to ensure the company has room for growth. This can either be through the acquisition of new customers or organizational enhancements to the company. Due diligence on your part is critical to evaluate the company’s financials, management team, and competitive landscape to name a few. That said, you need to feel comfortable that any advisors you’ve retained will be able to perform due diligence or contract with temporary staff to do so.
Carefully navigating each stage of the transaction process, along with thoughtful and thorough preparation, will lay the groundwork for a smooth and successful acquisition process. It can be the hardest and most frustrating experiences of your life. Deals fall apart even at the closing table, so being well informed and prepared can minimize wasted time and money. And just remember, once you’ve closed the deal, the hardest part is yet to come!