How to Plan and Execute Successful Acquisitions

Terry Gambill


The Acquisition Process

In 1998, almost 4,000 middle market acquisition transactions occurred in the U.S. Based on two key demographics that kind of activity will significantly increase over the next 10 years. Currently, more than 50% of the privately held businesses in the U.S. have a principal owner age 55 or older. At the same time, a huge amount of baby boomer capital funds have entered the market looking for the right investment. There are currently $45 billion dollars of raised but not placed acquisition kids looking for businesses to buy.


Before even considering an acquisition, check your motives. What do you hope to accomplish with the acquisition? Doing an opportunistic acquisition just because it is there can drain cash, dilute management focus and disrupt your long-term business strategy. When doing acquisitions the first step is to understand why and create some goals. Ask questions like:


  • What is the deal?
  • Who is it with?
  • How big is it?
  • Why do we want to do it?
  • How fast do we want to do it?


Internal growth is always less risky than doing acquisitions. Internal growth tends to be incremental acquisition growth tends to be exponential. You can get big chunks of growth at one time, but it requires a lot more risk. Make sure you understand what you want to accomplish with the acquisition and why you want to accomplish it. Some good reasons for doing an acquisition include:


  • Expand your customer base
  • Improve utilization of resources
  • Gain market share
  • Decrease competition


Before jumping into an acquisition, first look at the other alternatives. Can you meet your needs with strategic partnerships, minority relationships, private labeling, partnering with customers or some other approach? These all tend to be less risky than acquisition. But if you can only achieve your goals by acquisition, then it becomes an appropriate approach.


After identifying your goals and considering the alternatives, the next step is to develop an acquisition strategy. Unfortunately, many small- to medium-size companies overlook this step. They get involved in acquisition because it feels good or because they can. More often than not, this leads to unsuccessful deals. Instead, establish some key parameters for the deal. What are you looking for in terms of who, what, when, where and why?

Next, create a one-page acquisition criteria sheet that identifies your most important deal criteria. What type of company do you want to acquire? What size? What price range? Public or private? Do you want to buy stock or assets? Are you willing to deal with the emotional issues of a private seller? If you can’t write your acquisition criteria on one sheet, you don’t have clear acquisition criteria.


Keep your criteria narrow enough to keep you away from diversionary acquisitions, but not too conservative in size and scope so that it eliminates all candidates. Don’t be overly conservative in size. Acquisitions have cost windows. A $1 million and a $10 million acquisition have about the same costs in terms of professional fees and one-time, incremental costs. Plus, due diligence takes the same amount of time. So don’t underestimate the size of the company you think you can acquire.


Before making an acquisition, it’s essential to make sure you have the right foundation in place in your business. If you’re not careful, you can put too much weight on a weak foundation and pull down the whole business. If you want to be an acquirer, start working on the infrastructure that will prepare you to manage a larger organization long before you get ready to make the deal. Infrastructure issues include computer systems, management teams, financial planning and reporting and all the other things that entrepreneurs sometimes ignore. If you don’t have a solid foundation when doing an acquisition, you will immediately find out where you are short.


Doing acquisitions is very situational. How much infrastructure you need depends on the type and size of the acquisition you make. If you acquire a whole company and consolidate it into your existing one, the issues are consolidation, information systems and management chemistry. If you acquire a product line, the issues are manufacturing, technology and so on.


Each situation is different. The key is to determine your critical success factors ahead of time and be prepared to handle them. Success doesn’t mean just closing the deal. It means achieving a significant improvement in your business as a result of the acquisition. It means improved market share, enhanced customer relationships, a broader product line and so on.


Success requires a well-defined and well-executed strategy. When determining your acquisition criteria, decide (with your management team) whether you will deviate from your criteria and under what specific circumstances. Opportunities may come up that don’t meet your strategic criteria. Knowing that it lies outside your strategic parameters, requires you to approach the deal much more carefully. Putting up the red flag makes you think about the acquisition differently. Doing an acquisition is like interviewing a teenager who comes home at four in the morning — you’ll never get the whole story. The more an opportunity diverges from your strategic criteria, the less you will understand the business and the more difficult it will be.


Fundamentals of a good deal include:


  • Realistic plans and expectations in terms of magnitude and time schedule
  • Appropriate price and terms
  • Realistic debt load
  • People plans are clear and well-executed
  • Reasonable additional investment in capital, R&D, etc.


There are two key questions in any acquisition:


  • Will it increase profits?
  • Is the risk acceptable?


If you can’t answer “yes,” to each question, don’t do the deal. All acquisitions are risky, no matter how good they look on paper. No-risk or low-risk acquisitions simply don’t exist. You can manage risk to some extent by buying assets instead of stock and by including representations and warranties in the agreement (make sure to get finds placed in escrow to support the reps and warranties). You can also use terms to lower risk and spread it around, but you can never eliminate it.



When someone offers to buy your business, immediately respond with, “That’s interesting, what’s your acquisition strategy?” If they don’t have one, you might not want to sell (unless they offer you a lot of cash). Without a strategy, there are too many factors that could end up negatively impacting you and your company in some way.


When you want to acquire a company, first put together your strategy and determine whether the risk is acceptable. If so, the next step is to pro forma your concept, take it to your bank and begin to raise money. Never call your banker and say, “Guess what? We signed a letter of intent to buy another company today and we need some money!” Bankers do not like surprises. Instead, talk to your banker and start lining up the money well in advance of the deal. Make your banker a partner in your concept. That way, he or she will be a lot better prepared to help find the deal.


Be prepared to talk to your banker on different terms. ‘When it comes to acquisitions, banks want to know different things about your business. They want to know that you have built a strong foundation and that your management team has prepared itself to do an acquisition. The things you do to make your banker comfortable supporting your business on an ongoing basis will not be enough to make them comfortable to loan you money for an acquisition. Expect them to ask a lot more questions about where you are in your business. If they don’t, they are probably just giving you lip service rather than seriously considering your deal.


The size and type of deal will determine where to go for financing. If the acquisition will add 50% to your business over the next year or two, bank finding will offer the lowest cost. If you do something more significant (like a rollup), a bank won’t provide the kind of money you need to do the deal. You will need to contact the kind of lenders who participate in a higher risk and higher return transactions. Be aware that those kinds of lenders will want higher interest rates and some equity.


If you’re going to be in the acquisition business, consider a three-bank strategy. Work with three banks at the same time, providing them the same information about your acquisition strategy, your quarterly statements, etc. Only do business with one bank at a time, but keep the other two informed and waiting in the wings. A deal that doubles the size of your company may require you to change banks because they are always willing to do more to get a customer than keep one. One of the best situations is when a loan officer that likes you goes to a different bank. That gives you an advocate in a bank that doesn’t have your business. They see you as a potential new customer, and so may be more willing to help you make the deal.




Potential sources of acquisition candidates include:

  • Trade shows
  • Related companies
  • Competitors
  • Vendors
  • Customers
  • Distributors


Key traits of successful buyers include:

  • Discipline. Stick to your acquisition criteria, don’t chase opportunistic deals and take the time to build and maintain your foundation.
  • Persistence. Acquisitions in middle market companies are often based on personal relationships. Those relationships require persistence.
  • Patience. Stay in touch with multiple candidates over an extended period of time. People and circumstances change. A “no” today doesn’t mean a “no” forever.
  • Good sense of timing. Doing acquisitions is a lot like fishing. You have to be in the right place for the kind of fish you want to catch. You have to determine what kind of bait and tackle will work for that fish, put the line in the water and then have the patience to wait for a bite. When you get a fish on the hook, don’t mess around. Reel it in as hard and fast as you can to get the fish in the boat. An acquisition should close in 60 days or less. If it takes longer, there’s something wrong with the deal or you’re not reeling hard enough. Private sellers, especially those who founded the company, tend to have a lot of emotional issues. They need to sell to someone they trust, someone who will take care of their “child.” Look for things that are not important to the seller but can be important to you, or things that are not important to you but can be important to the seller. These will help you address the emotional issues of a private seller.


Approach candidates proactively. Call the business owner and invite him or her to have lunch with you. Say, “I’d like to chat with you about where you think our industry is headed, where your company is going and whether there might be any strategic possibilities between the two of us.” if the owner says, “We have nothing to talk about,” ask, “Do you mind if I call you back in six months to see if anything has changed?’ Chances are they will be willing to have lunch with you. This kind of dialog begins to open a relationship.


At your first face-to-face meeting, do not say, “I’m interested in buying your business.” Instead, develop the relationship first and begin to explore ways that you could work together. Don’t assume anything about the person or their business. They will have issues that you can’t know anything about — divorces, problems with kids, partner problems and so on. These won’t come out in initial discussions, but you can eventually discover them. Go in with an open mind and ask very open-ended questions about the kinds of things your companies could do together.


The negotiations begin the first time you meet the owner. Sellers prefer to sell to people they respect, so it’s essential to build the relationship. Talk about your values and what you are trying to do with your business in a general strategic sense. Disclose information that is available if they want to look around but they probably haven’t heard before. The idea is to create a dialog that will encourage them to share information about their company.


If your conversations progress far enough, you might want to sign a non-disclosure agreement. However, do not propose this step until the seller is reasonably comfortable with the discussions and you’re starting to get into some substantive issues. Non-disclosure statements are not legally binding in court. But having a small business owner sign the disclosure almost always gives you a moral and ethical commitment that takes the conversation to another level.


To negotiate successfully, be prepared to walk away from the deal at any time. If you get emotionally involved, if you start giving too much here and there, you may get into a deal that started out good but turned into something that won’t work. Constantly think, “What will cause me to walk away, and am I there yet?” Knowing your walk-away triggers and actions will help you negotiate a better deal.


Don’t let your attorneys get involved in the negotiation. Never let your attorney talk to the owner’s attorney. You and the seller should do all the talking. Then have your attorney write the documents so the seller doesn’t try to negotiate the deal in the document. Make your attorney take out everything he added in to try to give you things the seller didn’t agree to. Then take the document and personally give it to the seller or the other attorney.


Remember that attorneys are trained to win lawsuits. They have a win4ose mentality. They aren’t trained in compromise or finding common ground. If you don’t manage the attorneys through the process, they may kill the deal. When possible, use an acquisition specialist rather than your general counsel.


More negotiations are destroyed by ego than any other factor. Keep your ego in your back pocket, even if the seller engages in “ego-flexing’ activities, and you will come away with a better deal.


At some point during the conversation with the seller, start to probe for price. Assuming that you think the business is worth about $10 million, you might ask the seller, “I’m not sure of the value of this business, but I think it’s somewhere between $5 million and $25 million. “Am I in the ballpark?” If the seller says “no,” you have a problem. If the seller says “yes,” ask, “Are we closer to the $5 million or the $25 million? What are you thinking about the value of your business?” Get into a discussion where you can get into the ballpark.


The seller will always give you a higher price. Never respond with surprise, outrage or indignity, as in, “Fourteen million dollars? Where did you come up with that price?’ Instead, calmly respond with, “That’s interesting. When we have some time I’d like you to share with me how you got to that number. For now, it helps me to understand what you’re thinking.”


If the seller likes you, they will be more flexible. So go slow and build the relationship. The last thing you want to get into is an auction situation, where the seller is playing off two or more potential buyers. Sellers love auctions, especially a three-party bidding process because that makes it hard for any one buyer to have a good feel for what the other two are doing.


One of the most important questions is, “Why is the company for sale?” Ask that question of as many different people as possible until you find out the real answer. Often, particularly in privately held companies, the seller doesn’t know the real answer.


Accountants have many different methods of valuing a business, so don’t ask your accountant to value the company you’re looking to buy. The value depends on the industry of the company you’re buying and your industry. Valuation is not a science, and prices can vary all over the map. Price also depends on what you are buying — assets versus stock, small company versus large, private versus public, etc.


There are two kinds of buyers in the marketplace—financial and strategic. Financial buyers usually pay less. Strategic buyers will demand a lot more information because they know the market. Once satisfied that the deal makes sense, they will pay more.


The main hot button for the seller is always price. They want to be able to brag about the top price, not about the tern’s and conditions of the sale. Let the seller set the price as long as you can set the terms. For example, a million dollars in cash is not the same as two million dollars structured as $100,000 down, $400,000 in five-year, no-interest notes and $1.5 million as 5% of sales over the next five years. The present value of the $2 million is slightly more than a million and you get the seller to share the risk. If the business goes into the tank over the next five years you only pay 5% of whatever the business ends up being worth.


Common types of deal terms include:

  • Earnouts
  • Consulting agreements
  • Royalties as a percentage of the deal
  • Seller notes with lower-than-market rates or no interest at all
  • Step payouts based on company sales incentives


Paying cash is not good, low down payments are. Making sure any contingency payment terms have a finite life by date, not by sales. Always have a cutoff date. A consulting agreement with the owner should be part of the deal, not an add-on.


If you buy inventory, buy it on consignment so that you pay for it as you use it over time. This doesn’t tie up your money and significantly reduces the amount of due diligence. The older the business, the more likely it is to have old inventory. Anything with visible dust on it is old inventory.


The more you can work on terms with the seller to share the future, the more you share the risk of the acquisition. Anything you can do to attach payments to future activities will reduce your risk and get the owner to share the risk. Warranties and representations can be used in the same manner. It’s easier to lower risk through creative terms than it is to try to find the right price. Every deal has so many variables that it’s hard to understand the true value of the business. The larger the business, the harder it is to value it. The protection comes from the terms.



Once you have a clearly defined acquisition, pro forma the deal, listing all your assumptions in detail. One of the best ways to get better at making acquisitions is to revisit your initial deal assumptions once a year. Determine which ones were correct and which were not. As you move on to other deals, your assumptions will get better. To make good acquisitions, you have to make good assumptions about what will happen in the future.


Look at the synergy factors and risk factors. Do multiple risk pro formas, one optimistic and one very conservative. Show the bank the conservative one. Analyze profit and cash flow, keeping in mind that cash is king, but even more so during acquisitions. Do a gut check by asking, “If everything we can imagine goes wrong can we survive?” lithe answer is “no,” walk away from the deal. Be ready to handle significant unexpected events.


Due diligence depends on what you’re buying, such as assets versus stock or product line versus a company. Pay attention to business, financial, accounting, tax, regulatory and chemistry issues. If your acquisition will include management or people, do chemistry due diligence. Lack of chemistry is the biggest reason for acquisition failure.


Put together the letter of intent, which ensures you the fundamental deal agreements are in place. Then do the due diligence, use teams of’ experienced professionals. Manage the professionals so they don’t become gum in the gears. Once you reach this point, you should be able to close the deal in 60 days. The letter of intent should include:


  • Who is doing the transaction
  • What the transaction consists of
  • Complete descriptions of the items being purchased
  • My people issues in the transaction
  • Price and terms
  • My conditions precedent to closing the deal
  • My contingent issues
  • Representations and warranties that are normal for that type of business


Look at a letter of intent as a summary of the agreement without the specific representations and warranties.


As soon as you discover any of the following, immediately walk away from the deal (even if you are well into the process):

  • The first lie or misrepresentation
  • The first chemistry conflict, no matter how small
  • Different stories from different people in the organization


These negative events always represent the tip-of-the-iceberg. Do not dismiss them as incidental.


The main reasons deals go bad include:

  • Unwillingness to walk away, particularly when deep into the deal.
  • Bad acquisition strategy.
  • Chemistry and cultural conflict.
  • Failure to understand your own core competencies and weaknesses.
  • High prices (particularly cash) caused by overestimation of market potential or synergy.
  • Unrealistic expectations for the effort required to get the expected return.
  • Poor integration plan.
  • Failure to consider the negative impact on the buyer’s customer base.
  • Sloppy due diligence or ignoring red flags during due diligence.



A rollup involves acquisition of several companies, which leads to an IPO. The most successful rollups involve putting together preliminary financing to acquire a platform, usually with three to five companies in an industry. A consolidator puts together private financing, signs a letter of intent with the companies, buys them with the private financing and rolls them together. Then the new entity goes public and uses the stock from the public transaction as the currency to continue the rollup. One key to success is creating a vehicle that others in the industry want to be a part of; usually by getting some well-recognized companies in the rollup and a key management figure (who is respected and trusted in the industry) to run the new entity.


As a preliminary step, you can do letters of intent with two or three companies and use them to seek the private financing. But it’s hard to keep the acquisitions moving forward, especially when doing multiple ones at the same time. It’s a lot easier to pro forma the concept and get the private placement funds. Many angel investors and venture capital people are interested in doing these kinds of deals.


Unfortunately, many rollups roll up and then roil over. They lose momentum because the management team hasn’t prepared for the second stage of running the business once the growth slows down. Wall Street wakes up to the fact that all the growth is coming from acquisitions, not daily operations, and the stock price goes into the tank. Because the acquisitions have been done with stock currency, the owners who sold their companies into the rollup end up getting far less than they anticipated.


Businesses that get into the rollup early on usually make out the best. The ones who come in at the end of the deal receive inflated stock for the currency. When the stock rolls over, they find out they didn’t get such a good deal. There needs to be a compelling reason, such as lower costs through economies of scale or some new technology, for the rollup. Otherwise, chances for success are slim.




TEC – How to Plan and Execute Successful Acquisitions – Terry Gambill