Preparing Yourself for an Acquisition

fl020002Preparing 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

Fidelity Bank

(952) 830-7230

www.fidelitybankmn.com   

 

Have something to add?

Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples. 
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One thought on “Preparing Yourself for an Acquisition

Add yours

  1. Steve,
    Just a few points to help liven this discussion.
    Your banker is likely to know its clientele well and listed companies which will be covered by an analyst in one bank or other and your banker can get hold of these reports. The problem is when dealing in the small caps. One banks are not interested in the predeal work, i.e. market intelligence, best fit etc and will only roll out of bed for the financing. Secondly, the bank will not have much interms of information on smaller private companies (small cap) and so cannot help you there.

    To cover your points:

    1. Payback period is important, but so is ROIC which has to be set at hurdle rates over and above the IRR or there is no point acquiring.
    Also sometimes you have to pay more than the current value of a company as a seller will understand that the combined value of the companies is great than his or yours on its own and he wants a bit of that or no sale. This is why on the run up to a takeover or when a takeover is anounced the share price jumps. The same for smaller caps with fairly switched on vendors. If you are not a swithced, then get an advisor like your bank to help. Problem is if you are small cap, the bank may not want the work and you have to look at a boutique CF house.

    2. SPot on. Only count the tangible synergies (clear accounting savings etc) and the rest is upside. Make sure you cross against Rappaport 7 drivers for creating shareholder value. Same applies in acquisitions. Recommend a book :Corporate Financial Strategy by Ruth Bender and Keith Ward

    Agree more or less with the rest, but whatever happens make sure the communication is done correctly to reassure and keep the key people in the target company or all will be lost!

    James Masacorale
    M&A Manager
    Wolseley UK Ltd

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