Strategic advice | September 2024 How to acquire a business: A 3-phase guide

Painting a clear picture of what you hope to achieve through an acquisition will put you in a better position to achieve that vision. Hubbard says your M&A goals should fall into two primary categories: strategic and financial.

Strategic goals might include:

• Increasing market share, either offensively or defensively if you feel you’re losing ground to a competitor
• Adding new products or services to your existing business
• Expanding into new geographic areas
• Incorporating skilled or specialized workers into your team

That last point is one Hubbard says is growing in importance as the labor market tightens. “Acquiring businesses that have a skilled team in place already is a strategic goal that many companies are thinking about,” he says.

When it comes to financial goals, you might be looking to:

• Increase revenue and profitability to build scale
• Diversify revenue streams
• Diversify your customer base
• Realize cost synergies—what Hubbard calls the holy grail of M&A

“In acquisitions, there are often opportunities to remove costs from the combined business. These are usually related to duplicative layers of management, redundant facilities, and increasing negotiating leverage over suppliers and partners,” says Hubbard.

Once you’ve defined your objectives, your investment banking team can identify potential acquisition targets to help you meet your strategic and financial goals. Or, if you happen to have one or more targets already in your sights, they can analyze the potential impact and help you execute the transaction.

“We get asked to jump in at all points of the M&A journey,” says Hubbard, “from helping formulate a strategy to approaching and vetting a short list of targets to helping purchase a particular company you’ve already identified.”

Narrowing down a list of targets also means identifying which ones are actionable. The biggest question: Is the ownership group willing to sell? Regulatory requirements should also be factored in. Hubbard says larger transactions will be reviewed by the Federal Trade Commission or the Department of Justice—and the antitrust standard is stricter than it was just a few years ago.

“It’s an important filter when you’re thinking about a deal, because you could spend a lot of time and money looking at combining with your number one competitor only to have it shot down by the regulators,” says Hubbard.

One of the best ways to improve the actionability of your desired target list is relationship-building over years and sometimes decades. Hubbard says waiting for a business to come to market could leave you in an auction amid a long list of competitors.

“The best acquirers build relationships at the management and board levels within their industry and hope to one day be able to approach that target in a scenario where they’re the only buyer at the table,” says Hubbard. “A lot of deals we’re a part of involve relationships that started 10 or 20 years ago.”

With your list of potential targets whittled down, phase two begins with the approach. It’s all about getting the attention of the management team, ownership, or board of directors so you can begin to exchange information. Your investment banking team can help get those conversations started, whether that involves cultivating relationships, providing connections, or developing the script for the initial approach.

“You’re pitching the vision of what your two companies could do together,” says Hubbard. “You have to think about the incentives of the people on the other side of the table and present a vision that meets the objectives of both parties.”

If the target is open to a potential transaction, they’ll likely ask two questions:

• What information do you need to give me a firm value?
• How long will it take to sign and close the deal?

This is where the process of buy-side due diligence and valuation begins. After a nondisclosure agreement is signed, your advisory team will ask for a first batch of confidential information from the seller, such as two to three years of audited financials, the current year’s unaudited financials, an employee census, a list of top customers and contracts, and any helpful sales and marketing information.

“The Truist team can be really helpful throughout the due diligence and initial valuation processes,” says Hubbard. “Buyers tend to be quickly overwhelmed by the flood of data and information provided by the target. Having looked at hundreds, sometimes thousands, of businesses in our sectors, we can help our clients identify the most significant value drivers and risks presented by the target.”

Once you’ve determined a value for the target, it’s time to look at the bidding strategy. Do you offer what you think is full price or hold back and negotiate? Your bid might also include other important disclosures, like the expected time to sign and close, how you’re financing the deal, and whether you’re open to the seller maintaining a residual equity stake.

“There are a million different permutations of the bid strategy,” says Hubbard. “But it revolves around knowing the person on the other side of the table, who their advisors are, and how they’re likely to react.”

If both sides agree on the initial valuation and other key terms, the target will often allow you to proceed to a more in-depth due diligence process. While it can be shorter in some instances, this stage usually takes four to six weeks. During this time, you’ll have access to significantly more target company information and likely the target’s management team. You’ll take a deeper dive into the company’s financials and delve into its operations, physical and IP assets, sales and marketing functions, and growth strategy.