Some companies pursue growth through acquisitions by initiating a search for potential targets suited to their strategy. Other firms may be prompted to consider acquisition by seeing potential in a company they already do business with (or compete against).
Whether a potential acquisition surfaces through deliberate efforts or opportunistically, there are several important ways that a CFO can contribute to an acquirer’s success in the early days of identifying and engaging with potential sellers:
- A network that provides connections to potential sellers
- Informed speculation about a seller’s financial expectations and requirements for a deal
- Early assessment of a seller’s preparedness for a sale process
- Identification of the financial premises that will be most critical to a potential deal’s success
- Early views on potential deal risks
Network of connections to potential sellers
There is no single way in which acquirers connect with potential sellers, so it’s well within the range of possibilities that the CFO might have a relationship or connection that helps with an introduction. The diversity of potential paths to a target acquisition is well illustrated by the accompanying chart from a recent study of M&A practices published by the National Center for the Middle Market (www.middlemarketcenter.org).
Many CFOs have relationships with commercial bankers, investment bankers, business brokers, accounting/tax advisors, and industry consultants, any of whom may provide discrete introductions towards exploration of an acquisition. Keeping these lines of communication open will naturally increase the likelihood that an introduction is forthcoming. Professional networks (e.g., CFO Leadership Council, LinkedIn) may also facilitate connections suited to a warm introduction for purposes of exploring acquisitions.
Informed speculation about a seller’s financial expectations and requirements for a deal
Ahead of initial discussions with a would-be seller, an acquirer’s preparation should include consideration of how an overture of possible acquisition or other strategic relationship might be heard by the seller. For many such situations, a CFO may be uniquely capable of providing informed speculation about the financial and transactional expectations for the “other side”.
“Key issue here is really understanding seller motivation, especially when privately held. If not truly motivated, the whole process can be a useless time drain.” Middle market private equity investor
Motivations to sell (or not) will vary from owner to owner and across time. Among the common reasons that may contribute to an owner’s consideration of a sale are the following:
- Diversification of personal wealth/assets (notably in privately-held businesses)
- Access to growth capital
- New growth opportunities
- Absence of viable succession plan
- Alternative to liquidation (in the case of a distressed company)
“Conversations on outright sale of business really hinge on valuation, whereas mergers/deals for stock consideration involve coalescing seller objectives and finding structure to suit.” Private equity investor
While a definitive assessment of a would-be seller’s point-of-view is difficult, a CFO should contribute to an assessment that can help guide early interactions and set the stage for negotiations and due diligence. Further, a CFO can assess the preparedness of a seller for the sale process itself (e.g., quality of financial records, organization and completeness of business records). These insights from the CFO can help a buyer to develop suitable negotiation and due diligence processes suited to the sophistication and preparedness of the seller.
Financial premises most critical to a potential deal’s success
Although detailed financial modeling becomes more relevant at a later stage of discussions, in most cases the financial “building blocks” of a prospective deal are broadly identifiable and useful to consider at the beginning of exploring an acquisition, for example:
- Purchase price and transaction costs
- Debt, equity and cash financing
- Current financial performance of the target
- Revenue synergies (or potential losses)
- Expense synergies (or incremental spending)
- New customer, geographic, product/service opportunities
- Other deal-specific impacts (e.g., tax related, transitional expenses)
A CFO should prompt early discussion regarding these “building blocks” with a view of jump-starting the thinking about how a particular deal could bring new opportunities, challenges and risks.
Early views on potential risks
Speaking of risks, acquisitions have inherent uncertainties and the world’s first risk-free deal remains to be done. Nevertheless, the CFO is well-placed to suggest areas of risk particular to a deal that all members of the acquirer’s deal team should be mindful of. Some risks with a specific target may have such uncertainty that any transaction is ill-advised. Other deal-specific risks may be the subject of discussion during integration planning or negotiation of the purchase agreement. Still other risks may influence the company’s valuation or contingencies in post-closing payments. At the start, the most important action is to begin a dialogue of about identifiable risks and the need to remain attentive to addressing new risks that emerge in the course of evaluating the deal. A CFO should identify as many “red flags” as early in the process as possible, to help guide both the negotiations and due diligence efforts.
Finally, don’t forget the risk of not doing the deal and then competing with a new owner of the target company.
A notable “watch-out”
There’s no time like the start of new project to cast doubt, raise concerns, and identify the reasons why failure lies ahead. Acquisition opportunities are certainly an example of this.
Based on recent research with over 200 executives and advisors active with acquisition, almost 50% of our survey respondents considered naysayers – deal opponents or problem highlighters – helpful, almost 20% considered them simply a “distraction”. In some cases, as one respondent put it, “Opposition was discussed and senior leadership prevailed”.
And so, a final observation for CFOs and others involved in acquisitions is to encourage open dialogue, contribute concerns constructively, and avoid casually dismissing dissenters.
About The Author
Joseph Feldman is President of Joseph Feldman Associates (www.josephfeldman.com), a Chicago-based corporate development consulting firm founded in 2003. The firm provides acquisition and other strategic transaction consulting for growing companies and their investors.
Recent Articles also written by Joe Feldman
ACQUISITION STRATEGY: 3 QUESTIONS YOU NEED TO PREPARE FOR
TEAM FORMATION: PART II IN THE ACQUISITION STRATEGY SERIES
KEY SUCCESS DRIVERS IN DEAL NEGOTIATIONS: PART III IN ACQUISITION STRATEGY SERIES
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