In an ever-growing competitive landscape, private companies are now seeking the smartest route forward in their growth strategies. For many, that means a renewed interest in merger and acquisition activity.
Whether you’re considering a merger, acquisition, divestiture, management buyout, or entry to new markets, the right deal can offer a wealth of opportunity. But the wrong deal can expose your business to significant risk.
Here are some things to consider when deciding if an acquisition is the right strategy for your business.
Is now the right time?
Considering an acquisition can be tempting. Just because you can acquire another company doesn’t necessarily mean that you should. Understand what’s involved in the acquisition. Having a clear picture of the resources, leaders, investment and governance required can help you decide if it’s the right strategic direction for the business at the current time. The reality is that in order to conduct proper due diligence you’ll need to have advisors and management teams available to determine how best to integrate the new business into your existing organization. Understanding your time and capacity commitments are important in determining if now is the right time to move forward with a transaction.
Are your finances in order?
Amidst promising signs in capital markets — including increasing liquidity, low interest rates and vibrant competition among banks — you may be considering accessing capital to finance your company’s current and future needs. Do you have a financing plan in place? Addressing your company’s business plan can help determine your funding requirements, how capital will be deployed and when it is needed. You’ll want to determine the current financial strength of the acquisition target. Accurately measuring projected performance against your financial benchmarks is a must. Identifying an acquisition target with proven earnings and a foreseeable return on investment can assist you with securing capital from investors.
The importance of due diligence
Engaging in a process of critical analysis is essential for any successful acquisition or partnership. As a buyer, you need to be confident in understanding where the value lies and the potential risks. Proper due diligence can equip you and your investment partners and lenders with a clear understanding of the story behind the numbers. When considering an acquisition, examining the financial implications of past reporting, and analyzing projections can help you structure a deal that optimizes both risk and tax implications. The length of time necessary for effective due diligence varies with every acquisition. It’s critical to invest the time necessary to really understand what you’re getting into. Are you confident that you know what organizational, reputational and financial risks may be involved in the transaction? Be sure!
Your overall plan
Before committing to the acquisition process it’s important that you do your homework. You’ll want to ensure the potential target fits into your business strategy. Is there alignment with your short-term and long-term goals and objectives? The process can become an emotional roller coaster. It’s critical to keep your management team from overcommitting to a specific business. You need to take a step back and be objective at all times. It’s important to balance the price being offered for the target, the likely cash flows, the integration strategy and the potential risks of the deal structure. Use your board and outside advisors as a sounding board to be sure this acquisition is the right decision for your company and shareholders.
Aligning your business’s transaction plans to its strategy is an essential but often complex operation, requiring experienced professional guidance to reveal the potential benefits, hidden risks and the full costs. Taking the time upfront to determine if you’re ready is an essential element to your future success.
Logan Day is a Transaction Advisory Services Partner in EY’s Private Mid-Market practice. Follow EY’s Private Mid-Market practice on Twitter @EY_CAPrivateCo. And visit us at ey.com/ca/pmm.