Starting the Acquisition Process: A Handful of Quick but Critical Tips

So you’ve decided to grow your business by acquiring another business – but where do you go from here?  What do you need to be thinking about?  Worrying about?  Taking care of?  To get you started, here are a handful of tips – you can even call them “nuggets” of advice – that come out of real life experiences I’ve had in the course of completing many, many acquisitions over more than two decades:

Nondisclosure Agreement.

Most any Seller with trade secrets or other intellectual property will ask you to sign a Nondisclosure Agreement before telling you very much of value about their business.  There’s probably no getting around it, but here are a couple of thoughts:

  • Get the Nondisclosure Agreement reviewed by your legal counsel to be sure it’s not overbroad and don’t be afraid to negotiate the agreement’s terms with the Seller.
  • If you have concerns about your ability to comply with the agreement’s requirements (for example, because you are a serial acquirer and look at many dozens of companies each year), consider limiting how long the confidentiality restrictions last.
  • And perhaps most importantly, put procedures in place to prevent unintentional disclosures that breach the Nondisclosure Agreement.  Among other things, limit the number of people on your side who will have access to the Seller’s confidential information in the due diligence process; be sure that each of those people reads and understands the Nondisclosure Agreement; and even make each of them sign a separate agreement between your company and him/her prohibiting disclosure of the Seller’s confidential information and binding them indirectly to the Seller’s Nondisclosure Agreement.

Letter of Intent.

Not every deal has a Letter of Intent (LOI) and it doesn’t always make sense to have one.  In fact, don’t waste time drafting and negotiating an LOI until you and the Seller are roughly in the same “ballpark” when it comes to a purchase price.

Once you settle on a rough purchase price, though, it’s often wise to have at least a short LOI summarizing the proposed deal terms before you invest too much more in professional fees, time, and other resources.  What deal terms are most important?  Things like: purchase price; terms of any earnout, purchase price adjustment, seller financing, and treatment of indebtedness; desired tax outcomes; and whether executives will be asked to sign any employment agreements or noncompete agreements.

If you have a LOI, make sure it is fully non-binding if that’s your intention.  If you agree with the Seller that a portion of the Letter of Intent should be binding on you or the Seller, be express and specific about which portions are binding.  Be especially careful not to bind yourself accidentally to negotiate the proposed terms summarized in your LOI – in other words, preserve as much flexibility as you can to negotiate completely different terms than those described in the LOI, and even to walk away completely for any reason or no reason at all.

Due Diligence.

Last but not least, take time at this early stage of the acquisition to set up a thoughtful, orchestrated, and efficient due diligence process.  That initial planning should include the following:

  • Assemble one team to conduct the financial due diligence and a second team (typically lawyers) to conduct the legal due diligence; and then set up a system to coordinate findings made by the two teams.
  • Think carefully with your advisers about what issues and concerns are likely to be most important to your decision on whether or not to move forward with the acquisition; and, once you make the decision to move forward, what matters are most important to how you structure and negotiate the acquisition and prepare for post-closing integration.  You might call these the “big boulder” matters.

Once that’s done, do a short and intense diligence review of the “big boulder” matters.  On the business side, these may include things like an assessment of the quality of earnings and relationship with key customers; and on the legal side, things like regulatory and tax compliance, governmental or third-party consents needed to complete the acquisition, and actual or potential legal claims and liabilities.  This initial diligence review will help you spot issues and challenges early in the overall process but if you decide to move forward with the acquisition, your diligence teams will need to go back and make a more thorough review.

Getting the acquisition process started is sometimes the hardest part, and hopefully these tips will help get you over the proverbial hump.  You’ll have other questions and concerns, but that’s what your legal and business advisors are for, so use them.  Make a plan today, start executing, and get that acquisition done!

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3 Responses to “Starting the Acquisition Process: A Handful of Quick but Critical Tips”

  1. This is a great starting list. The due diligence seems critical. Depending on the size and complexity of the deal, what would be the ideal makeup of the due diligence team? Would a forensic accountant be going overboard?

    • Thanks for your comment. A forensic accountant may be going overboard, especially if your target has audited financials. That said, if there’s anything specific about the target’s financial condition that is not readily ascertainable from the financial statements, then a forensic accountant could be helpful. To answer your other question about the ideal makeup of the due diligence team, it’s somewhat fact specific but in many cases would include a lawyer, an accountant, and an investment banker, a as well as select people from your the buyer’s internal deal team. Hope that’s helpful and let me know if you have any other questions!

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  1. Starting the Acquisition Process – A Handful of Quick but Critical Tips | Corporate Growth...Capital Style - May 4, 2016

    [...] If you have a LOI, make sure it is fully non-binding if that’s your intention.  If you agree with the Seller that a portion of the Letter of Intent should be binding on you or the Seller, be express and specific about which portions are binding.  Be especially careful not to bind yourself accidentally to negotiate the proposed terms summarized in your LOI – in other words, preserve as much flexibility as you can to negotiate completely different terms than those described in the LOI, and even to walk away completely for any reason or no reason at all. For the rest of Aaron’s tips, including a helpful list of steps to take during the due diligence … [...]