There's no faster way to grow your company than by acquiring another company.  However, corporate acquisitions are tricky, so here's now to ensure that the one you're contemplating makes solid business sense.

1. Determine your strategy.

There are four reasons acquiring a company rather than growing your current company organically:

  1. Expand into new markets. You acquire a company whose products are complementary to your current products, in the expectation that the sum of the parts will be greater than the whole.
  2. Obtain advanced technology.  You acquire a company that has technology you need for your product set but which would be difficult or time-consuming for you to develop yourself in-house.
  3. Get hard-to-find personnel. You acquire a company that employs a set of highly-skilled employees rather than going through the time-consuming process of recruiting them individually.
  4. Increase market share.  You acquire a company that is directly competitive to your own thereby securing their customer base without the bother of fighting a series of competitive battles.

2. Assemble your acquisition team.

You'll want to draw upon the skill set of internal and external experts before, during and after the acquisition.  The earlier you get the right people involved, the more likely you'll end up with a deal that works.  Here's who you need:

  1. A responsible executive. A single person should be responsible for the acquisition and act as team leader. In most cases, it's the CEO of the firm doing the acquiring.
  2. An investment banker.  Even small acquisitions are financially complicated, so you'll want input from somebody who's worked these issues in the past.
  3. An experienced lawyer. Acquisitions entail complicated rules for what you can say or do; counsel can help ensure you don't accidentally screw up.
  4. An HR expert.  If you're acquiring people along with the company, you'll probably need somebody to help work inevitable people issues.
  5. An IT expert.   You'll need to meld whatever hardware and software the acquired firm is using into your own system.
  6. A public relations person. From the start, you'll want to position the acquisition positively to your customers and investors.

3. Do your due diligence.

Due diligence takes place in two phases.

The first phase is before the target firm's management knows you might want to acquire them.  During this phase, your team checks the information that's publicly available: web pages, job listings, news stories, conference proceedings, blog entries, SEC filings and so forth.  You goal in this phase is confirm that the firm in question will, in fact, fulfill your strategic objective.

The second phases starts after you contact the management of the target firm with the (hopefully) good news.  Tour their corporate facilities, poke around to see what's what, and then have the management in for a series of meetings that drill down into various elements of their business.  You're looking to answer the following questions:

  1. Are their numbers real?
  2. Are their products real?
  3. Are the people high quality?
  4. Will they fit with our corporate culture?

4. Make an initial offer.

Assuming you the answers to all those questions is a resounding "Yes!," it's time to talk turkey, as they say.

Just as a first impression often frames the future of a sales opportunity, the initial negotiation frames the discussion that will take place as you settle on a deal that makes sense.

As the acquiring firm, you should make the first offer.  After all, the acquisition is a manifestation of your corporate strategy, and you'll be the company responsible for the success of the merged entity.

As you do so, it's important to remember that you're not just buying a company, you're buying the good will and active participation of the people who've been working inside that company.

Leave yourself some room to negotiate, so your financial offer should generally be around 75 to 90 percent of what you actually think the firm is worth (to you).  BTW, if your initial offer is seen as an insult, the acquisition is probably not going to happen.

5. Negotiate the terms.

Your goal is to generate an agreement that will lead to a successful integration of the acquired firm into your own.  Even though you don't want to overpay, this is not the time to get cutthroat. You really do want to achieve the proverbial "win-win" scenario.

Sooner or later you'll settle on a price, but for you this process is more than just haggling. What's important isn't so much the dollar figure but the rationale behind each offer and counteroffer.

Use the financial negotiations to probe issues that might affect the success of the merger, such as unexplained variations in the selling firm's revenues.  That way you'll emerge from the financial discussion with a clear picture of what you're buying.

Once you've settled on the basic price, it's time to work the "soft" issues, like who's going to still have a job (and what that job will be) when the deal is done. As with price, the key to success is knowing exactly what you want to accomplish.

An acquisition is inherently a highly emotional process. Use time spent on negotiations to "sell" the acquisition to the employees in the target firm and to your current employees.  The last thing you want is a talent exodus.

6. Draw up (and sign) the contract.

Contrary to popular belief, the negotiations don't end when you go to contract.  On the contrary, it's often the negotiating of the specific terms that causes the most problem.

To ensure a pain-free contract process, document all decisions and commitments that are made during the negotiation process. When verbal agreement is reached, review the main points and obtain an agreement from both parties not to surface additional issues.

Use your lawyer as an advisor rather than a gatekeeper.  Corporate lawyers can always find a reasons NOT to do something.  They provide useful advice but ultimately you're the one who must decide if the risk is worth it.

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