Corporate Finance
Feb 21, 2023
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In this guide, we explain the buy-side M&A process from start to finish so that readers can understand how merger and acquisition deals work. This guide is designed as a walkthrough of the M&A process from the perspective of a potential buyer (acquiring business). Here are some key takeaways about the M&A process:
This guide breaks down the M&A process from the perspective of the buyer (the acquiring business).
The M&A process will look different from the perspectives of the buyer and the seller. This is because the steps taken to start searching for potential businesses to buy, are different from the process taken to get the word out that your business is for sale. Here, our focus is on the buyer, but the M&A process may look similar at some stages as many of the steps in this M&A process involve both the buyer and seller. You can see how the sell-side process works here.
For purposes of this guide, we’ve chosen to break the M&A process out into nine stages. The fact that the process is nine steps versus fourteen, is not set in stone. Some businesses look at the M&A process in a more granular way than others do. For purposes of explaining what is going on at each stage, this nine-step M&A process timeline is perfect for gaining a comprehensive understanding of how M&A deals work from the buyer's perspective.
That said, here we’ll briefly look at the pros and cons of expanding or collapsing the process into fewer or more steps. By looking at the process in more steps, it's easier for a business to “check off” progress at each stage. M&A deals take a great deal of effort to make progress in. The M&A process is more often than not, a slow and tedious one. While it is not to say that the M&A process should be “rushed,” effort is required to drive deals forward and looking at the M&A process in more steps as opposed to fewer, gives the deal team more milestones and objectives to strive for along the way. The drawback to this is that it complicates the process. Looking at the M&A process in fewer steps makes it easier to understand the big picture at each point in the process.
We believe that looking at the buy-side M&A process in nine steps is a great way to gain a comprehensive understanding, without adding any unnecessary confusion to the process.
This section will break the buy-side M&A process down into nine steps. This infographic will serve as an illustrative companion to the guide so that readers can see the process overviewed in summary before we dive in deeper.
1. Determine Acquisition Strategy — When someone refers to acquisition strategy, they’re referring to the underlying motivation for doing the deal. Companies form an acquisition strategy based on what they’re trying to achieve with the deal. There are two types of buyers in M&A transactions, financial and strategic. Financial buyers are interested in buying a business they can exit at a profit at a later date. Strategic buyers are other companies looking to do an M&A deal to grow and improve core operations of their existing business. Financial buyers are more concerned with present cash flow and are typically non-operators. For strategic buyers, generally, the two major motivators for doing an M&A deal are to add value to their existing business, or to reduce the risk of competition. For buyers, developing a strong acquisition strategy means clarifying intentions from the beginning. What does the acquirer hope to achieve with this transaction? Why do it at all? How will this impact them in a meaningful way? Will it help them to break into a new market or reach a new customer base? Provide cost savings? Regardless of the motive, at this stage we must define our objective for the deal. You can't hit a target that you can't aim at. M&A deals are fantastic vehicles for growth if done for the right reasons, but they are costly mistakes when they fail. To better understand acquisition strategy, we recommend our guide: Financial vs Strategic Buyers as a resource to help you understand the two types of buyers in M&A deals. We also recommend our guides: Types of Mergers & Acquisitions and Financial Synergy to better understand what strategic buyers look for in a target business.
2. The Search For Target Companies — This stage of the M&A process involves three major elements. Here, the acquirer will take their acquisition strategy and decide on the search criteria for the businesses they will look at, they will begin that search, and they will approach those businesses and see if they are open to doing a deal. Naturally, there will be more businesses in the world that aren’t an ideal match than the ones that may be a good fit. This step is essentially to help the buyer narrow their search and be more productive with the M&A process. When they actively begin their search for target companies they often go through channels, such as M&A firms, investment banks, and other business connections. What they will receive from these channels are known as teasers. A teaser is a short, one-or two-slide summary of a business, designed to keep the seller’s identity anonymous. The buyer can see high-level key information about the target business from the teaser and determine if this business meets their search criteria. To learn more about the process buyers use to find M&A deals, we recommend our guide: How Strategic Buyers Search For M&A Deals. If, based on the teaser, the prospective buyer is interested in the business, they will move forward with the target company. Normally, this process starts with the signing of a Non-Disclosure Agreement, designed to protect the seller's identity. In exchange for this NDA, part of what the prospective buyer will receive is known as a Confidential Information Memorandum. It's also normal at this stage for the buyer to reach out to the seller and have some initial talks to determine if their objectives for the sale are in line with what the buyer is looking for in an M&A deal.
3. Business Valuation & Analysis — If the deal has progressed to this stage, then in order to move forward with the M&A process, more detailed financial analysis is required. For this, the buyer will need more information than was in the teaser. Many businesses that are acquired (the vast majority) are privately held. Meaning they don’t publish detailed financial information the public can see. The acquirer needs more, substantially detailed financial information so that it can decide if it makes business sense to acquire or merge with this company. This is what they get with the confidential information memorandum. With this information, this part of the M&A process will involve the completion of several valuation models so the acquirer can determine a price range that might make sense for this transaction. It’s important to have an idea of what a company is worth before any negotiations can start. This analysis will be vetted, verified, and readjusted during the due diligence phase, later on. To learn more about the valuation process, we recommend our guide: Intro to Private Company Valuation.
4. Negotiations — After the acquiring company has performed its valuation analysis of the target company it will be able to make an opening offer. Making this offer is the next step in the M&A process. Normally these negotiations begin when the prospective buyer reaches out to the seller with an initial Indication of Interest (IOI). Here, an initial intention is laid out before the deal terms are heavily negotiated. At this step in the M&A process, there will be back-and-forth, and terms will be negotiated. These negotiations end when the acquirer has presented the target company with a preliminary, partially binding offer, and they’ve accepted it. This is normally accomplished with a Letter of Intent (LOI). This letter is intended to formalize some of the key points that have been discussed up until this point and to give the buyer a period of exclusivity in which to conduct their due diligence.
5. Due Diligence — This is the part of the M&A process where the acquirer takes a deeper look to make sure everything is as it’s supposed to be. This is a lengthy, often drawn-out part of the M&A process. Here, the acquirer will begin to vet and verify the financial information they’ve based their initial models on. Accounting leaves room for interpretation. The acquirer goes through everything from assets to customer lists, and human resources during this stage. The acquiring business will also visit the corporate headquarters of the business during this stage to witness “business as usual.” The due diligence phase is designed to address the fact that the seller knows more about the business they are selling than the buyer does. The intention of the due diligence process is that the buyer will have a much better understanding of what they are buying after this stage is complete. In a sense, the purpose is to verify that the business being acquired is indeed worth the investment. To learn more about this stage, we recommend our guide: Due Diligence In M&A.
6. Definitive Purchase Agreement — If everything came back copacetic in the due diligence process, and there were no issues that could potentially kill the deal, the next step in the M&A process is completing the final contract to sell the business. At this point, if there were any major discrepancies found, new offers were made or the deal was terminated, respectively. It is not uncommon for the buyer and seller to revisit the negotiation table because of new information discovered in the due diligence phase. However, assuming that this deal is moving forward, the M&A process progresses to this stage where the final contract is signed. To get to this point, both parties have the intention to go through with the deal. Assuming the deal moves forward to this stage, there is also consideration to the purchase agreement. (ie. Are they buying an asset, or shares of the company?) To learn more about this stage, we recommend our guide: Definitive Purchase Agreements.
7. Deal Financing — Many acquisitions involve the use of leverage. In private equity for example, this is a huge part of the acquisition strategy. Using leverage means the acquirer uses debt (or borrows money) to help them finance the deal. There are many ways to use debt to finance an acquisition, including the use of mezzanine debt (subordinated debt) and term loans (senior debt). Most M&A deals involve the use of financial leverage. In almost every case the acquiring company would have explored potential financing options at step one in the M&A process, as the use of leverage would make or break their ability to do a deal in most cases. At this stage, however, financing typically comes together (after the final contract is signed). To better understand deal financing, we recommend our guide: What Is Financial Leverage.
8. Integration & Turnaround — This is when the deal closes, money is exchanged, and the management teams work together on next steps. This is the final step in the M&A process, and likely where your acquisition strategy ends and your turnaround or integration strategy begins. This is where the acquiring company begins to execute on the plans they made in step one. Now they can see their acquisition strategy and the criteria they set for the deal begin to turn into a tangible business result.
9. The Exit — The exit is a stage in the M&A process where the acquiring company divests (sells) the business it has purchased through this process at a later date. Some acquisitions are not intended to have an exit, meaning that the acquiring business wants to keep them indefinitely, or absorb them as in the case of buying a competitor. In mergers, there would be no exit strategy, because the two companies combine in a merger and cease to exist independently as they become one entity. Often, however, acquiring businesses make their acquisitions with the intent to exit them later on at a profit. Various exit strategies include IPO’s (initial public offerings) the outright sale of the business to a private equity company or strategic buyer, or the breakup and sale of the company’s assets.
