The M&A Lifecycle: Planning Phase

Throughout the M&A lifecycle, companies have many opportunities to add value to their side of the deal. Transaction leaders need to understand how to govern the time and resources of every stage. Each stage is a balancing act, whereby too many resources spent can result in a loss of value while underprioritizing can leave money on the table. Finding the right balance is key to every stage in the M&A lifecycle and will help the company develop the necessary framework and confidence to undertake future deals.

We view the M&A lifecycle in three major phases. The first phase, planning, is the time your company will spend preparing for the following phases. The evaluation phase begins after you have identified your target and ends at the closing of the transaction. The execution phase entails all of the integration of assets and operations.

In this article, we will be covering the planning phase. Next, we will discuss opportunities within the Evaluation phase.

The Planning Phase

By the end of the planning phase, you should have a detailed understanding of each decision you are planning to make through the end of integration. Of course, there are unforeseen considerations that will arise throughout the deal process. Still, your ability to predict various outcomes will be a determining factor in the deal's success.

Strategy Creation

Creating your overall strategy is arguably the most critical step in the deal process until post-acquisition. Getting your ducks in a row here will save your organization the time and resources of future course correction.

  • Depending on your organization's goals, most long-term M&A strategies are best suited to include plans for multiple deals. Understand that meeting your ROI objectives involves factors that are sometimes out of your control, such as economic forces as well as changes in the regulatory and legislative environment. A sound strategy is to continue with M&A deals at set intervals and avoid attempting to time the market.
  • As a strategic buyer, you are in direct competition with the financial buyers of private equity and venture capital. Depending on your industry and size, this competition may be a significant risk to your strategy and can make the structure of your deal even more important to entice a seller. Taking an acquisitive strategy through a tax-free reorganization can potentially make your offer more attractive than that of a financial buyer. If this strategy makes sense for your company's goals, it can be a direct advantage you have over financial buyers.
  • Tax considerations such as the trafficking in NOLs are also crucial at this stage as they can drastically alter the direction of your M&A strategy. Details such as lack of asset continuity can wipe out pre-change NOLs, making an otherwise successful deal take an avoidable blow. For a free consultation from an expert who has been through multiple deals, reach out to us.
  • Transaction leaders need not be the subject matter expert (SME) in areas such as these; however, understanding where SMEs can add value is crucial to creating a strategy poised for success.

Set Criteria and Identify Your Targets

It is essential to avoid falling too deeply in love with your target company. Your strongest negotiating tool at every point of the deal is your ability to walk away, and you need to have the strength to do so if that's where the data is pointing you. The main objective of the due diligence process is to find those areas of concern and, if necessary, walk away from the deal. Never assume you will solve all of the target's red flags; stay true to your criteria and strategy and know when to walk away. Once you have created your overall strategy, it's time to identify specific details about your targets that align with your strategic objectives. If you already have the target company in mind before setting these criteria, you should pursue that target with caution. You will want to complete the criteria setting process entirely to stay as objective as possible during your target identification. After setting the criteria, you will begin looking for a target through various ways, some of which we'll cover below.

  • Consider the basics: Geography, product lines, employee base and growth, company size and growth, profitability, and more.
  • Stay broad in your search: This will help you reduce the likelihood of paying a premium as well as discover industry trends.
  • Never exclude companies that are "Not for Sale": The best deals are often the companies that don't realize they want to sell yet. You may need to do some more convincing as the buyer, but that should be more evidence to you of a great target. When deals approach you, you can assume there will likely be some red flags to uncover during the due diligence process.

Look in multiple areas:

  • Service providers: Investment bankers, CPAs, insurance, attorneys, brokers are all great sources of deals as they are regularly in contact with clients who may be open to selling.
  • Competitors: The most ideal option may be the one right in front of you. Your competition should show significant signs of synergy with your current business.
  • Other online tools: Investment bankers' websites, search engines, Sourcescrub, and others.

Finally, before you reach out to your target, you will want to have a valuation estimate together based on a multiple of earnings. From a pricing standpoint, typically, sellers want to see a multiple on earnings, but that can change based on specific industries and circumstances. If you have not engaged an advisor who has been here before, now is the time to do so. Future litigation concerns arise the moment you attempt to contact your target, making it critical you have professionals working beside you who do this for a living. For more information on why we believe we're your best option for this type of advisory work, feel free to book a time now for a free consultation.

Want regular insights on finance and leadership?

Subscribe and we will send you the latest articles and resources to help you better run your finance function.