Determining An Acquisition Strategy:

Before an acquiring business can set out searching for target companies to buy, they need to think through what they are trying to achieve with this M&A deal. Their acquisition strategy is the underlying motivation, or the strategic rationale behind this decision. Why do an M&A deal at all? What does the buyer hope to accomplish with this deal?

To learn more about acquisition strategy for M&A deals, we recommend our guides: Understanding M&A Strategy and Types of Mergers & Acquisitions. These guides will serve as excellent resources for understanding why strategic buyers do M&A deals.

Once the buyer has determined their acquisition strategy, they will need to distill it into actionable search criteria so they can focus their search.

Determining M&A Search Criteria:

This stage is where the acquiring business takes their acquisition strategy—the underlying reason why they're looking to do an M&A deal—and distills it into a checklist that that they can use to determine if a business is a potential fit for a merger or acquisition.

Without determining and defining specific search criteria, the M&A process becomes wasteful.

The purpose of defining and outlining their search criteria is to narrow their search so they can make more productive use of their time. The search process can be time consuming and tedious. Naturally, there will be more businesses out there than there will be companies that meet their search criteria.

The search criteria are based on what the acquirer is trying to achieve. If the business is looking to buy a manufacturer, then they can narrow that search down by excluding businesses that don't manufacture. While that statement may strike you as obvious, understand that this process is more of an art than a science.

The more detailed the search criteria are, the more businesses that will naturally be excluded as potential acquisition targets. The search criteria determined should be designed to focus the search without making the search criteria too narrow to be helpful.

In the search for a potential manufacturing business to buy, they would want to think through what they need to accomplish with this deal. If they were looking to buy a manufacturer in order to increase production by ten thousand units per year, then they would need to exclude manufacturers that don’t have the capacity to produce that volume. Additionally, they are also able to exclude much larger manufacturing companies.

Again, this process is an art and the trick to it is how to narrow a search to make it more productive, without making the search criteria so restrictive than it rules out some companies that would otherwise be a decent fit. It’s worth stating that these criteria are a starting place for the search, not the end point—and should be treated as such.

How Strategic Buyers Conduct Their Search:

When we think of "searching" for something to buy, we tend to think of browsing online catalogues or window shopping. So, it can seem counterintuitive to people unfamiliar with this process that serious acquiring companies searching for privately held businesses don’t go about searching for companies to buy as they would start searching for a new car. While there are marketplaces and "listings" of businesses for sale, this is not normally the way that businesses are sold once they reach a certain level of revenue.

The search for target companies involves going through intermediaries and networking above all else.

First, acquiring businesses can go through professional intermediaries, meaning that they reach out to other well-connected individuals and institutions that operate in a middleman like capacity. These middlemen include business brokers, investment banks and M&A firms. These businesses are well-connected and can normally offer strategic buyers a number of options.

From the seller's perspective, often when an entrepreneur is looking to sell a business, they will also look to go through an intermediary. Both the size of the seller’s business and the type of exit the seller is looking for will factor into this decision. Small businesses often look to business brokers to help facilitate a sale. Usually, medium-size businesses looking for an outright sale will go with a boutique M&A firm, and larger companies as well as companies looking to exit through an IPO, will normally go through investment banks. You can learn more about intermediaries in M&A deals, here.

So how do these intermediaries find potential deals for strategic buyers?

When a seller formally decides to sell, they will create a teaser. A teaser is a short, one- or two-page (or slide) document that gives potential buyers key information about the seller’s business, while keeping their identity anonymous. Through a teaser, strategic buyers can see high-level key information, like revenue and earnings for the past several years as well as insights into the industry and nature of the business for sale. If the acquiring company thinks this seller meets their search criteria, they will progress to the next stage, where they will determine a price range that makes sense to pay for the business—and contact the management team at the business for sale and try to judge whether they are open to a potential deal or not. We will explain that part of the process next.

Second, and in addition to professional intermediaries, we have networking as an option to find businesses for sale. The key to understanding this is that not all businesses that are a great fit will be “for sale” at that moment. Many M&A deals are put together when representatives of the buyer reach out to businesses that are not yet for sale and find that they may be. Through networking with other business owners and professionals, many deals are sourced and put together for strategic buyers. Strategic buyers that buy lots of businesses develop long-term relationships through multiple networks and intermediaries to source potential deals more consistently.

Additionally, small businesses (businesses under $5 million in revenue) may go through business brokers to try and find a buyer. These smaller deals usually fly below the radar of M&A firms, and brokers will be the primary sourcing strategy for acquiring businesses looking to buy small businesses. Strategic buyers can build relationships with business brokers if they are interested in buying small businesses.

When Do Strategic Buyers Approach Businesses For Sale?

Once a strategic buyer has set their search criteria and has found some potential deals that appear to be a good fit, there is a final step to the actual search phase.

M&A deals are complex and multi-faceted. Many deals fall apart before they can be finished. Here, it’s important to note that just because a potential business for sale looks like a good fit, doesn’t mean that the seller is open to selling it right now, open to selling it to them, or open to selling it for a reasonable price.

In order to progress the M&A process further from here, strategic buyers need to approach the seller directly and have some initial talks with the management team involved in running the business. These talks are centered on whether the seller is open to doing a deal, and what that deal would potentially look like.

For context, confidentiality is still a major concern for the seller. The teaser, where the buyer has gotten all of their information up until this point, has left the seller anonymous. In order for a strategic buyer to have these talks, they will go back through the channel that provided them with the teaser and they will sign a formal non-disclosure agreement before learning the identity of the seller.

Confidentiality is a major issue for the seller in M&A deals. Normally, the buyer (if a private company) isn’t really concerned with confidentiality because it wouldn’t really impact their business if word were to get out that they were in the market to buy. The seller has lots of concern for confidentiality. A few reasons to keep the seller’s identity a secret include the fear of blowback from long-standing customers or the fear that key employees may jump ship.

The degree to which the seller is concerned with confidentiality, as well as local laws will determine exactly what legal documents are signed at which stage of the process. Normally, however, confidentiality will begin with the teaser and progress to the NDA. From there, the prospective buyer will typically receive a confidential information memorandum (CIM) giving them access to more detailed information about the business. With this information, the buyer will begin analyzing the company and come up with a price range that might make sense to pay for the business. Alternatively, there could be a series of non-disclosure agreements as they are deemed necessary. M&A deals are complex, multi-faceted, and often extremely litigious. The exact use of each legal document is less important to understand here than it is to understand that confidentiality is an issue—and that these documents are normally put in place to protect it.

Progressing further, if the seller is open to doing a deal, and the prospects are promising, then the next step will be to set up a secure deal room, and for negotiations to begin. There may or may not be an additional NDA’s put in place here.

If the deal progresses, the buyer will want to see more detailed financials and will begin asking deeper questions about how the business operates. With this information, the buyer will move to the next step in the M&A process, where they perform their valuation and analysis of the company in order to determine what the seller’s business is worth.

From here, they will present the seller with an opening offer, and negotiations can begin.

Recommended Resources:

• The M&A Process Explained
• Strategic Buyers in M&A
• Understanding M&A Strategy
• Types of Mergers & Acquisitions
• Non-Disclosure Agreements in M&A