Pursuing M&A in the Right Way

Many business owners who were thinking about a merger or acquisition have not been deterred by the unprecedented and swift changes we have seen in this economy. In fact, 2021 was a very active year for M&A, and momentum has carried into 2022. Capital that may have been on the sideline at the beginning of the pandemic ultimately came back in force. And without exception, sellers haven’t been getting any younger, which is another motivating factor. Historically low interest rates – despite the recent increase and additional rumored bumps – coupled with an emergence from COVID-19 are also influencing strong M&A activity.

Before joining this trend, though, it’s helpful to learn about best practices used by so-called serial acquirers—the companies that make buying other businesses a central element of their strategies.

M&A Best Practices

The best of them maintain focus and only pursue transactions that are right for strategic objectives and are fit culturally. Always employing abundant discipline and no emotion (or little emotion), they are not afraid to step away from a transaction that isn’t ideal.

Successful serial acquirers can articulate how they plan to create value over time and how potential acquisitions will contribute to that value. They typically assign the responsibility for seeking and negotiating acquisitions to specific executives and outside advisors, providing plenty of time to accomplish those tasks.

When a deal comes together, the integration plan becomes critical. The best acquisition can fail if the two companies are not integrated effectively, so successful acquirers develop standardized processes that consider business operations and focus on culture and people.

Funding and Structure

In the M&A field, there is no substitute for experience. Knowing how to identify funding is a good example. Moving quickly can be the difference between closing a great deal and losing out to another acquirer. That’s why lining up a reliable source of funding should be a first step in the process.

Sellers find cash offers highly appealing, so companies with sufficient cash available will have an advantage. However, an all-cash acquisition has drawbacks. It can eliminate a cushion that might help your company through an unforeseen future crisis. Furthermore, the costs of most acquisitions don’t end when the deal is signed. Integration may require significant additional investment.

Acquisition loans can be another option. In some cases, it may be attractive to rely on existing relationships with local banks’ loan officers whom business owners know and trust. If the local bank lacks expertise in M&A deals, however, rates and terms may be less attractive.

In that case, a specialty lender that works directly with companies in your industry could be a good option. These lenders have a solid understanding of how companies are structured and operate, and enough familiarity with the nature of income streams to approach the underwriting with realistic expectations and a full understanding of inherent risks.

Even more ideal is a blend of these two scenarios. For example, Oak Street Funding – a First Financial Bank company – offers specialty loan products to customize funding for acquisitions. Oak Street works hand-in-hand with First Financial’s local bankers who provide expert advisory service to businesses in the community.

Equity and Earnouts

If a business owner has the ability and a willingness to offer equity to the seller, it may be an attractive way to fund part or all of the transaction. That’s especially true if the seller’s leadership intends to continue working in the business. Presumably, a company will be worth more after the acquisition, so there may be additional equity to distribute.

On the other hand, if a seller is planning to leave the business when the deal closes, earnout provisions can ensure they will continue to help keep the business thriving. In this arrangement, some portion of payment will be based on the acquired company’s future revenues. Sellers may even realize tax advantages with this approach.

Whether your business uses acquisition for growth or you’re thinking about a first-time acquisition, these concepts can help as you aim to complete a deal just as successfully as the most accomplished serial acquirers do.

Headshot of Rick Dennen

Rick Dennen

Chief Corporate Banking Officer, First Financial Bank, and President and CEO of Oak Street Funding

317-428-3800

First Financial Bank is a Goering Center sponsor, and the Goering Center is sharing this content as part of its monthly newsletter, which features member and sponsor articles.

About the Goering Center for Family & Private Business

Established in 1989, the Goering Center serves more than 400 member companies, making it North America’s largest university-based educational non-profit center for family and private businesses. The Center’s mission is to nurture and educate family and private businesses to drive a vibrant economy. Affiliation with the Carl H. Lindner College of Business at the University of Cincinnati provides access to a vast resource of business programing and expertise. Goering Center members receive real-world insights that enlighten, strengthen and prolong family and private business success. For more information on the Center, participation and membership visit goering.uc.edu.