Acquisition tips Featured

8:54am EDT October 25, 2006
Surpassing the competition requires taking long strides toward aggressive goals. There comes a time when some business owners must consider a business acquisition to maintain or promote growth.

“Strategic business acquisitions have incredible potential,” says Connie Beaumont, business banking manager and senior vice president for Wells Fargo’s Houston Business Banking Group. “An acquisition can lead to dramatic extension in market share, diversification in products and services, and expansion of the experienced managerial and labor pool.”

Financial services companies can play a key role in helping companies evaluate opportunities and execute acquisitions.

Smart Business discussed with Beaumont the process involved in a well-planned acquisition.

What self-examination should company executives do before they buy another business?
Companies should have a very high level of self-awareness before they pursue a business acquisition. This self-evaluation includes an honest look at the business’ current strengths and weaknesses. Executives should also have clearly defined strategies for both current and future operations. An acquisition should align with the overall goals of the company and put it in a stronger position to achieve those goals.

It’s also important to think through some of the ramifications of an acquisition.

  • Would the acquired business fit well with our existing company?

  • What is our potential strategic plan for the merger?

  • Is this the correct time for an acquisition?

  • How will this buy-out affect our current management structures and operations?

  • How will the industry perceive these changes?

  • How will the acquisition affect our customers?

These types of questions can result in intense discussions about sensitive issues. Prior assessment of the effects of consolidation of operations and resources can alleviate problems later in the process. Executives don’t want deal-breaker issues to surface after both companies become heavily entrenched in an acquisition.

What analysis should companies perform on businesses they consider buying?
Management should consider hiring a company that specializes in company valuation. These experts can assist executives in evaluating a potential buy and provide a benchmark price. In addition to looking at a company’s current performance, prospective buyers should carefully examine history and reputation. Due diligence should include a thorough review of at least the last three years of financial statements, tax returns and, if available, asset valuations.

Getting to know the senior management staff is another key to a successful acquisition. Understanding the staff’s culture and vision for the company will help executives evaluate whether the business will fit well with their current businesses. It’s also important to clarify senior managers’ roles before and after the acquisition.

What information do financial services companies require for acquisition financing?
Financial services companies will need standard financial reports from both the buyer and the seller. Additionally, financial services providers should have a working knowledge of the industry, products, and services involved in the acquisition. Companies should also execute a buy-sell agreement between the parties that explains the details of the transaction. This agreement will help everyone who is involved to have a clear understanding of the planned acquisition.

What factors do financial services providers evaluate in requests for this financing?
There are different considerations for each type of acquisition depending on its classification, such as inventory, fixed-asset only, real estate, or equipment acquisitions. Potential lenders analyze the financial strength of the acquiring company, which includes recasting[WF1] and stabilizing cash flow. To help ensure a smooth transition, the acquiring company should provide a comprehensive action plan of how it will incorporate the acquisition. This plan should include projected cash flow, management restructure and cash requirements. The financial services provider will determine the proper structure of the transaction by also considering collateral position, terms, risk and interest rates.

How can bankers facilitate the acquisition process?
Ideally, the banker, the attorney and accountant should all be involved very early. Bankers can assist both buyers and sellers by providing general information and resources. However, bankers should still remain objective and neutral throughout the process.

What services can bankers offer to help companies after the acquisition?
Following the acquisition, bankers have a vested interest in offering advice and services that can contribute to the financial success of the newly joined companies. Additionally, bankers can help with the evaluation and consolidation of the benefits packages. This includes assessing health and life insurance plans, 401(k) programs, and payroll services.

CONNIE BEAUMONT is a business banking manager and senior vice president with the Wells Fargo Houston Business Banking Group. She has 25 years of banking experience. Reach her at (281) 993-3122 or connie.beaumont@wellsfargo.com.