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How Distributors Can Successfully Buy the Right Firm - Part 1

(With several large and small distributorships telling us of their plans to acquire other companies, we decided to ask mergers and acquisitions expert George Spilka to provide some advice and insights on how to successfully acquire the right firm.-ed)

The first principle to remember is that consummating an acquisition is not your sole objective. Instead, your primary objective should be to only close a deal that is priced right with a culturally-compatible seller that can be effectively integrated with your operation. It is often said that some of the most successful deals a company is involved with are ones that don't close. The reason is that "no deal" is far better than consummating a mediocre or poor one. Foodservice distributors that utilize the process described in this article will greatly increase the likelihood of consummating only successful acquisitions.

The process is broken down into six basic phases that an acquirer must execute:
  • Define your organization's attributes, resources, acquisition objectives, and desired seller's characteristics.
  • Define the search parameters. Then execute the search to locate the most attractive acquisition prospects.
  • Make the initial contact with numerous potential sellers.
  • Proceed with your preliminary business and financial investigation of the most attractive seller.
  • Develop the initial offer and submit it to the seller. This should eventually lead to the negotiation of a letter of intent (LOI) between the parties.
  • Perform your due diligence, negotiate the definitive purchase agreement (DPA) and close the deal.

    Now we will discuss the six phases of the acquisition process.

    1. Define Your Organization's Attributes, Resources, Acquisition Objectives and Desired Seller's Characteristics. - The diligent performance of certain aspects of this phase is often neglected by many corporate acquirers. However an expertly-advised acquirer will execute this phase with sophistication and expertise, which will assure that successful results are produced by its acquisition program. The following are the factors to be considered:
    A. Mobilize Your Acquisition Team - Your team should include the senior executives of the company, including the heads of marketing, operations, the cfo, and any other executives instrumental in determining the company's strategic direction. I would also highly recommend that an acquisition advisor/investment banker be retained by a prospective acquirer to direct and guide the acquisition process. Their knowledge and experience can be of critical importance in defining the characteristics of an attractive, synergistic seller, amongst other things.
    B. Define the Available Capital to Commit to an Acquisition - This includes both the internal funds available to commit to an acquisition and the borrowing capacity necessary to finance an acquisition. If debt financing will be used to transact a deal, you should meet with your prospective financiers at a very early stage. The range of capital they might commit to a deal and the seller's characteristics they would look favorably on to adequately fund a transaction should be determined. As the acquisition process progresses, you should provide not only for the capital necessary to purchase a company but also for the funds required to consolidate and integrate the seller with your operations. In addition, a provision should be made for the funds needed to finance the seller's expected future growth.
    C. Define Your Corporate Culture - This includes a definition of your company's fundamental core philosophies of how to manage and administer a business, how to treat and compensate employees and how to handle and service customers. In other words, how does your company relate to the people that it interacts with in running a business? It is essential to locate a seller whose corporate culture is compatible with yours. In this way, the likelihood that the seller's personnel will continue to work effectively as part of your organization will be increased. If the seller's culture is not compatible with yours, it is likely that a deal will result in failure regardless of the other strategic benefits that the deal would produce. The importance of this factor cannot be overstated.
    D. Define Your Company's Fundamental Strengths - This refers to the fundamental business areas, where your company excels. The application of your skills in these areas should strengthen a prospective seller's business after the acquisition. This will provide synergistic benefits and result in an increased level of profitability from the acquisition. In this phase, you are reviewing the fundamental aspects of your business, including the following: your marketing program, your sales force, the strength and control of your customer base, the attractiveness of the various market niches that you serve, the capability of your organization to run a low-cost, high-productivity operation, the strength and depth of your management team, the financial and informational reporting skills that you possess, and the strategic vision that your management group brings to business and economic decisions.
    E. Define Your Company's Fundamental Weaknesses - This involves evaluating the same factors that you did in "D" above, to define the areas where your Company is deficient. In essence, you would like to find a seller whose strengths can be applied to your core business. This should enable you to run a more profitable operation.
    F. Do You Have The Necessary Personnel to Effectively Integrate and Consolidate an Acquisition? - Does your management team have the administrative skills to provide the selling company the necessary direction after the deal to strengthen its position in the market and optimize its operations, while effectively merging the two organizations?
    G. Define Specifically What You Want from an Acquisition.
    1. What geographic areas are projected to have strong future demographics?
    2. What market segments project strong future growth?
    3. What geographic areas or market segments would produce synergistic benefits to your core business, after they are integrated with your company?
    4. Which prospective sellers have weaknesses that could be fortified by your strengths? The integration of their firm with yours should increase the combined firms' profitability.
    5. Which prospective sellers have strengths or niches within market segments where your core business is weak? In these cases, the acquisition of the seller will tend to increase the profitability of your core business.
    The end result of this planning process should be the definition of the type of seller, whose combination with your business will provide considerable synergistic benefits, thereby resulting in a deal that will produce an attractive return on investment.

    2. Define the Search Parameters. Then Execute the Search to Locate the Most Attractive Acquisition Prospects. - The first step is to utilize your market knowledge to define companies that are likely strategic fits with your growth objectives. In addition, a search should be performed by accessing various data bases that are available to locate target companies. A sophisticated acquisition advisor/investment banker should be much more familiar with the available data bases and how they can be accessed to clearly target the seller type you are looking for. Furthermore, my experience has been that prospective sellers, who are either current or potential competitors of your company, will be more likely to open-up with an advisor than they will with an acquirer. If a prospective seller is approached by an acquisition advisor, they are more likely to feel secure that the acquirer is not just on a fact-finding mission to learn more about their company for self-serving reasons. The seller usually feels more secure with the sincerity of the acquirer's intentions, if the acquirer is expending money to obtain professional advice to expertly orchestrate a growth plan.

    3. Make the Initial Contact with Numerous Potential Sellers. - A corporate acquirer must not waste time and resources on sellers that are incapable for a variety of reasons of consummating a reasonably-priced and structured deal. The following factors should be ascertained in preliminary discussions with prospective sellers to assure that an acquirer is not wasting its time and resources by pursuing the acquisition:
    A. Ascertain that the seller is sincere about selling.
    B. Determine that the seller's price expectations are realistic. A seller's price must reflect its business's fundamentals, its expected future profitability and the risk inherent in achieving that profitability.
    C. The seller should have involved all of its critical advisors in determining its asking price. This must be verified at an early stage. Otherwise a deal that appears attractive, thereby causing the acquirer to commit considerable resources and time to investigate it, can turn out not to be doable because a key advisor introduced at a later stage might cause the seller to change his original position to an untenable one for the acquirer. The importance of this cannot be over-stated, as this is a mistake made by many unsophisticated acquirers.
    D. Be prepared to divulge your financial information to the seller at this time. If the seller is going to open-up its company to the acquirer, it is reasonable for the seller to expect access to the acquirer's past results. The seller has every reason to be as concerned about the acquirer's intentions and capability to successfully complete a deal, as the acquirer does to be concerned about the seller's sincerity and willingness to transact a deal at a reasonable price.
    (Continued Next Week)

    George Spilka is president of George Spilka and Associates, a Pittsburgh-based merger and acquisition consulting firm that specializes in middle market, closely-held corporations. This is his third article on sales and acquisitions in ID Access. Visit his website at www.georgespilka.com

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