Preparing Yourself for an Acquisition
There are a few things to consider when approaching your commercial banker to help finance an upcoming acquisition.
Given the current economic conditions, you may be facing an opportunity to acquire a long-time competitor who is now struggling. Acquisition might open the door to a new market, or it might mean the addition or expansion of a line of complementary products.
When it comes to financing the acquisition, you’ll no doubt talk to your commercial banker. But how about engaging the bank beforehand to act as a sounding board on the merit of the acquisition itself?
Your banker should act as an impartial third party in helping clients in acquisition mode, beginning at the exploration stage. While the banker should certainly have a strong desire to help clients close a deal, he or she must remain impartial and provide direct, honest feedback based on years of experience.
Let’s take a look at some critical issues to keep in mind when considering an acquisition:
1. Payback. Before making that critical “go-no go” decision, you need to measure objectively the payback period on the purchase price. How long will it take for this to pay for itself? Remember, it is important to pay only for the value your acquisition target has created. The value that your company creates belongs to you already.
2. Not So Sudden Impact. Set realistic expectations. Do not underestimate the challenge of achieving synergy and savings. Assume that it will take more time than you are estimating.
3. Collateral is King? Remember, however, that advance rates on many asset types have decreased during this economic downturn.
4. Structurally Sound. The important thing here is to keep in mind that all the pieces of the deal have to cash flow. With bank financing playing a smaller role in the overall structure of acquisitions, sellers are being asked to shoulder more of the risk and buyers are putting more equity on the table.
Showing your commercial banker that you have considered each of these four areas will contribute significantly to getting the deal done, quickly and efficiently.
Steve Stoup, Senior Vice President
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