Finally, the pool of candidates should be big enough to get a transaction done, says Harvath. A list of 100 initial companies is typically needed to come up with 20 firms that would fit the buyer's strategic criteria. "From that, you may get to a letter of intent or a deal in principle with three of them," he says. In order to do that, "you need a lot of conversations, and sometimes it takes 10 to 15 touches to have a conversation with a CEO in our industry."
Evergreen "talked to thousands of companies to acquire 19," Sahyoun says. Deals may be ruled out quickly for any number of reasons. "Sometimes a seller isn't interested and sometimes a buyer isn't interested, or it's not the right fit."
With that kind of commitment, it can be challenging for owners to both run their business and be on the hunt for an acquisition. Working with a buy-side broker that does much of the grunt work prior to a deal can be more expedient. According to Murphy, typical fees range from 1.5% to 3% of the purchase price. Some brokers also charge a retainer (less than $5,000 per month is reasonable) and a percentage fee contingent on closing a deal. A broker can also assist with the screening process. Once a list of companies is compiled, a broker can help cull those companies that are not suitable based on predetermined criteria and parameters. When a deal is in the works, a buy-side broker can help with due diligence, schedules, financial modeling, and transaction documentation, as well as facilitate work with legal and accounting resources as the deal nears completion.
The buyer should verify all the information provided by the target company once a letter of intent is signed. Evergreen, for instance, typically pores through QuickBooks backup files and historical bank statements. A buyer should create a due diligence plan that outlines verification details in different operational areas such as financial, legal, and HR.
At this stage, hiring professionals who are experienced in M&A due diligence is a must. Look to a CPA firm to conduct a quality of earnings report to detail revenue and expenses. A legal firm can review all contracts and pending litigation. An HR expert can examine benefits, payroll practices, and vacation policies. Among the last steps to verifying information is using a third party to survey customers and employees directly.
If you’ve done your homework, growth by M&A is a solid strategy. While recent economic disruptions may dampen M&A activity in the short term, Murphy opts to look on the bright side. "Companies can compare notes on how they dealt with the crisis," he says. "To have a bonding experience that they've survived is a great way to build relationships and build trust."