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The M&A Lifecycle: Planning Phase

The M&A Planning Phase is critical to the success of any M&A strategy. Read as we describe what makes for a successful Planning Phase.

The M&A Planning Phase is critical to the success of any M&A strategy. Read as we describe what makes for a successful 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 before completing the lifecycle in the Execution phase.

The Planning Phase

By the end of the planning phase, leaders should have a detailed understanding of each decision to be made through the end of integration. Of course, unforeseen considerations will arise throughout the deal process. Still, your ability to predict various outcomes will help determine the deal's success.

Strategy Creation

M&A is a tool by which you create value for the organization. We are not buying companies for the sake of it. Instead, there are ends we are after, and M&A is a means to accomplish them. Your corporate development strategy, in addition to M&A, should consider divestitures, strategic partnerships, and investments in new products, services, and technology.

Creating your M&A 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.

Deal Thesis

Start with a deal thesis. How is your acquisition going to add value to your current organization? Clearly define the new markets you hope to enter, the anticipated synergies you're targeting, and the micro and macro economic forces involved. The deal thesis should be the basis of every decision you make going forward, maintaining alignment throughout the phases of the deal.

Deal Succession

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 long-term strategy is to continue with M&A deals at set intervals and avoid attempting to time the market.

Integration Management

Most studies evidence a deal failure rate in the territory of 70 to 90%, and that staggeringly high number can be substantially attributed to a failure in the integration process. Set up your Integration Management Office (IMO) as early as possible to best plan for and govern the integration effort. Integration planning should ideally begin before target identification, with the bulk of the planning effort completed during due diligence.

Establishing the correct leadership through all levels of the deal and integration is vital for success. Your newly formed IMO will be comprised of leaders who will spend most of their time preparing for and implementing a successful integration. Preparing a solution to absorb their job duties is necessary to continue operations through integration.

Know Your Competition

As a strategic buyer, you are in direct competition with the financial buyers of private equity and venture capital. You also need to keep your eye on other strategics in your industry. 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, for example, 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. Finding any advantage you can as a strategic buyer is worthwhile pursuing, as financial buyers have their own advantages, including the speed at which they can pursue deals. Competition will vary among industries and deal sizes.

Consider Tax Implications and Involve SMEs

Tax considerations such as the trafficking in NOLs can 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, 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 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. It is not always the case, but when deals approach you, be wary of red flags to uncover during the due diligence process.  

Look in multiple areas:

  • Service providers: Investment bankers, CPAs, insurance brokers, attorneys 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 may show significant signs of synergy with your current business.
  • Other online tools: Investment bankers' websites, search engines, Sourcescrub, and others.

After completing the planning phase, the M&A lifecycle progresses into the Evaluation Phase, where the buyer works to become familiar with every detail about the seller.

Finally, before you reach out to your target, you will want to have a valuation estimate together based on a multiple of earnings through publicly available information or the research of a professional. 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 experienced professionals working beside you.

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