3 Steps to Prepare Your Business for an Acquisition

By Jennifer Mailhes, CPA, Managing Director

If an acquisition is one of your growth objectives in the new year, are you taking the right steps to ensure your business is prepared? Not only is it important to consider how an acquisition will help meet your overall business goals – which should always be discussed during the strategic planning process – but proper planning is also a key factor to ensure a successful transaction. Consider these three key steps to help prepare your business for a buy-side transaction:

1. Structure Your Balance Sheet

A balance sheet summarizes an organization’s assets, liabilities and shareholders’ equity. To help leverage your acquisition, make sure your balance sheet is structured correctly well in advance. A strong balance sheet highlights your company’s profitability based off current operations, which will help you obtain the debt to facilitate the transaction. Characteristics of a strong balance sheet includes:

  • Debt amortization approximate matches the economic lives of assets to the extent you have leverage (for example, a building loan has a longer term than a truck loan)
  • Low overall debt ratio
  • Working capital financing needs are on a line of credit, not tied up in long-term debt
  • Minimal or no related party receivables that are not in the ordinary course of business
  • Unneeded debt is paid (unless long-term debt is at a low rate)

In addition to a strong balance sheet, make sure your corporate entity is structured properly to avoid double taxation and help keep cash in your business. Two years prior to one of our clients making an acquisition, they restructured their corporate entity from a C-corporation to an S-corporation and converted a cash basis method of accounting for tax purposes. As a result, the client was able to keep $5 million of cash in the business and use those funds to acquire a company that was about equal in size. This change in structure also took a large deferred tax liability off of the balance sheet, which improved their debt ratio and allowed them to borrow the funds to make the acquisition. Without making these adjustments or possessing a strong balance sheet, they would not have been able to acquire the company.

2. Develop Your Acquisition Criteria

To begin the process of better defining the type business you would like to acquire and why, develop criteria based on how the target will help meet your objective. Ask yourself these questions to help you develop criteria:

  • Does the target need to be in a specific industry?
  • Are you hoping diversify your customer base?
  • Do you wish to introduce a new product or expand your service offering?
  • Will they help you expand geographically?
  • Is there a certain target size in terms of employees or revenues?
  • Is this target size in line with what you can afford?
  • Without a clear understanding of your acquisition strategy and purpose, it’s unlikely you will secure the necessary financing to close the deal.

3. Obtain a Strong Leadership and Advisory Team

The key to a successful acquisition is making sure you have a strong management team. Not only will they ensure you have strong financial and operational controls in place, but a reliable management team will also help build a stronger financial and operational focus on the business, as they will be involved in assessing the acquisition and later leading the integration process. Involve them early on and be clear about your growth objective so they fully understand why the acquisition is an appropriate strategy for your business. This will also help them better facilitate the due diligence process and prepare for the acquisition once it’s finalized. As you prepare your business internally, begin involving outside experts as well. Meet with potential lenders to help them become familiar with your business, gain an understanding of what you would like accomplish and learn what types of businesses you’re hoping to acquire. Have your tax advisor evaluate whether your business is properly structured for the acquisition and help minimize the potential tax impact. An investment banking team like ours can also assist in the preparation process by discussing your acquisition strategy, identifying target candidates, negotiating and structuring the deal, and more.

For more information on how to prepare your business for an acquisition, contact our investment banking team today.

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