class 17: strategic acqusitions - from target to integration

strategic and operational considerations associated with acquisition; provides a roadmap for the process, from finding a target to negotiating a deal to considerations of whether to make the acquisition an asset or stock sales

The acquisition funnel: from prospect to target

• structured, systematic approach to finding an evaluating potential business acquisitions; inverse of the sales funnel; instead of finding customers, you’re finding a business to acquire

• top of the funnel (prospects)

  • stage of identifying and reaching out to potential sources of deal flow

  • involves networking and seeking businesses that might be for sales, even if they’re not publicly listed

• middle of the funnel (leads)

  • businesses that have been identified and are a potential fit; you now begin engaging with them, gathering information, and performing an initial screening

• bottom of the funnel (targets)

  • you’ve identified a strong candidate and are ready to conduct deep due diligence and make an offer

• Sources of deal flow: who to contact for businesses for sale

  • business brokers - for small to medium sized businesses; common for “Main street” acquisitions; they represent the seller, not the buyer

  • accounting and law firms - act as “off-market” deal finders, connecting you with clients who want to sell their business privately

  • banks and lenders - banks will connect you with clients who are struggling to service their debt, making them potential targets for a turnaround play; also have a list of businesses that have defaulted on loans are not bank-owned

  • other sources

    • online marketplaces

    • industry networks and trade associations

    • direct outreach (“mailers'“)

    • private equity firms

negotiation tactics

• key negotiation levers

  • minimize the down payment or tie the down payment to a successful due diligence period

  • selling financing (seller note) - seller acts as the lender for a portion of the purchase price

  • earnouts - portion of the purchase price is contingent on the business achieving specific performance milestones

  • holdbacks (escrow) - keep a portion of the purchase price in this account for a certain period of time and release to the seller if no problems with the business arise

  • asset vs stock purchase

    • as a buyer, push for an asset purchase so you can cherry pick which assets you want and you are explicitly leaving behind the old legal entity and its liabilities

    • avoid a stock purchase because you are buying the entity itself meaning that you are inheriting all of its past, present, and future liabilities

    • if doing a stock purchase, negotiate for an indemnification clause where the seller agrees to compensate you for any liabilities that arise from the period before you owned the business

  • using the due diligence report by leveraging the weaknesses you’ve found to secure better prices or terms

general negotiation principles

• know your walk away price

• use data

• stay in control

• understand the best negotiations are win-win for both sides

• remember the professor hirsch technique to continue getting sellers to give you a counter-offer

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