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					                                     So you think you want to buy…!
                           William P. Erfourth
                           Principal
                           Transaction Advisory Services
                           Grant Thornton LLP



A recent survey conducted by Grant Thornton International Ltd determined that strategic buyers
“remain confident about undertaking acquisitions over the next three years.” This survey of 7,800 companies
from 34 economies world wide, discovered that 44 percent of respondent companies expect to
complete an acquisition as part of their growth strategy during the next three years. In North
America, including the United States, nearly half (48 percent) have an appetite for acquisition.

Yet despite their popularity, acquisitions – especially acquisitions done right – are no easy task.
Whether you are a first time acquirer or a seasoned buyer, the steps are similar.

Start with strategy
The foundation of any acquisition is the firm‟s strategy, and a clear understanding how the purchase
will support it. It begins with knowing where you want your company to go, your projections for
organic growth and the gap that remains to be filled though potential acquisitions.

A solid strategic foundation also includes an understanding of how you are going to evaluate and
value potential targets. To be sure, industry multiples are a good start in trying to price a deal. But
you also need to define those aspects for which you will pay a premium above average industry
multiples, or when you will insist on a discount from those averages.

To summarize, you need to consider three vital factors when evaluating potential targets:
    1. How an acquisition fits into the corporate growth strategy;
    2. What your firm needs in terms of competencies and expected synergies in filling the growth
       gap (growth target less internal growth equals growth gap); and
    3. How you will evaluate and value a potential target.

Acquisition funding
It should go without saying that funding is major consideration. Deals have fallen apart as potential
buyers waited too long to determine their ability to borrow. Determining how you might fund a deal,
and establishing your funding capacity, are issues that should be dealt with up front. In fact, many
potential targets will ask for some evidence, perhaps a letter from your bank, demonstrating your
ability to fund a deal.

Acquisition research



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You know what you want and what you think you can afford. The next part is determining “who.”
There are many deals presented by brokers or through trade magazines and other media. But do you
really want to buy those companies that are eager to sell? Fact is, when a company is up for sale,
there is a definite reason. Quite often you won‟t learn that until you are in the middle of detailed due
diligence and after you have invested significant time and money, not only for you and your company
personnel, but also with attorneys, accountants, tax consultants and others.

In our experience, there are plenty of attractive targets available in most industries who are not
peddling themselves as takeover targets. Consultants from Grant Thornton‟s Corporate Finance
group have been surprised on a number of occasions when they gone into a company to discuss a
capitalization issue and have discovered that the owner is interested in selling out. You probably
know companies that you admire and respect who would love to be part of your organization. But
for many of these companies, you won‟t know they are for sale unless you ask … or until you learn
that they‟ve been snapped up by a competitor.

Frequently, the company that is not up for sale can be the better deal. Market research will help you
identify potential targets. Once you have targets, be careful how you approach the target. In certain
cases, it should be CEO to CEO, or for confidentiality, you should hire an investment banker, like
Grant Thornton Corporate Finance, to approach the potential target.

Acquisition preparation
At this time, you should be asking yourself, “Am I ready for due diligence?” Note, the question is not
whether you are ready to conduct due diligence, but are you ready for due diligence. Many times, the
acquisition process is a two-way street. The target may want to complete due diligence on you.
Obvious issues for the seller are your ability to pay, whether you will actually keep the company and
grow the business, or if you plan to release all the employees that were loyal to the seller for many
years. This is a good time to ensure that your management group understands their roles in
responding to questions by the seller, that you have information on your company that you are ready
to share, and that you have a good story to tell to prospective sellers.

Also under the heading of due diligence, it‟s our experience that a little structure goes a long way.
You will be far more productive and successful if you determine, up front, who will be part of the
team. What will each member be responsible for? What external resources will you need?
The most common team members are:
    1. Attorneys conducting legal and human resource due diligence and helping with deal
       structure and deal documents
    2. Business consultants for evaluating the actual business and operations
    3. Accountants for financial due diligence
    4. Tax professionals for tax due diligence and deal structuring
    5. Appraisers to review and value fixed assets and perhaps intangibles
    6. Environmental engineers to assess potential environmental issues




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A good due diligence structure defines the team, assigns responsibilities and develops a timeline. You
also need to prepare an information request based on input from the entire due diligence team –
both internal and external.

Negotiations and the Letter of Intent
Let‟s assume now that you have identified several companies as potential acquisitions and have
selected a solid target. What‟s next?

Two key tasks are part of this step. The first is to conduct limited due diligence, primarily based on
public information and whatever the target is willing to share. As a prospective buyer, you want to
consider whether your time and resources will be well spent pursuing a target that‟s a good potential
fit for your company

If, after this limited review, you conclude that you‟re still interested in moving forward, your next
task is to prepare for a Letter of Intent (LOI). To Issue a Letter of Intent, you may need more data.
Frequently, you will be asked to sign a confidentiality agreement before the sellers will provide non-
public information. Often, the confidentiality agreement is used by sellers to control the amount and
detail of information they are willing to share. It may also involve additional provisions such as:
        Return of all data or documents if there is no sale;
        Publicity blackouts; and
        Non-solicit provisions of employees and/or customers.

Assuming that you‟ve identified an agreeable takeover target, it‟s time for a much more thorough
form of due diligence, usually consisting of a review of financial statements; observation of the
business (facilities, equipment, etc.); discussion on revenue sources and growth (and if you are lucky
enough, actual customer data); exploration of unique human resource issues such as employment
agreements or contracts, review of lease and rental data; and analysis of recent tax returns.

If you‟re satisfied with everything you‟ve learned in this more exhaustive due diligence process, you
should use competent legal professionals to prepare a nonbinding letter of intent with an exclusivity
clause. If possible, you should avoid participating in an auction and should prevent the seller from
entertaining other buyers while you invest money conducting due diligence.

Note that the LOI is not the purchase agreement. Many deals have fallen apart as buyers and sellers attempt
to create a “mock” purchase agreement rather than a simple LOI. Some factors that are usually in a
LOI include:
        General valuation – a potential selling price (fixed or a range)
        Form of purchase – asset or stock
        Debt to be assumed by the purchaser
        General terms of any employment agreements, leases, etc.
        General terms on not-to-compete and no-solicit
        Potential forms of payment


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       Exclusivity and the lock-up period
       Potential timeline
       Open or restricted access to seller‟s data, operations and employees
       Potential adjustment mechanisms
       Deal breaker conditions




Due diligence and the purchase agreement negotiations
Once the LOI is signed, two major tasks normally occur simultaneously – a third and highly detailed
due diligence exploration, and the preparation of purchase agreements.

Detailed due diligence should be designed to uncover problems of any kind that the seller might have
in the current business. In particular, you are looking for:
       Strengths and weaknesses of the target (operating, marketing, product and financial)
       Contingent and unrecognized liabilities
       Business risks
       Potential synergies or other business opportunities
       Integration planning
       “Stars” – those people that you don‟t want to lose
       Information validation – accuracy, completeness
       Quality of earnings
       Working capital
       Seller‟s business plan and projections

Using your team of both internal and external resources, you want to dissect management, operations
and financial results. Begin by determining, is there really a business to buy? Has management been
effective in growing the company, creating new products, attracting talent, and diversifying and
building their customer base? Then pursue a detailed and exhaustive financial review. Analyze the
income statement and balance sheet. Review cash flows. Have your auditor review their auditor‟s
work papers (this involves a waiver signed by all parties).

At this time, you need those other outside professionals – appraisers, environmental consultants,
insurance brokers, etc. – to complete due diligence and provide feedback.

Although most targets will provide projections, you need to develop your own. Use the results of the
due diligence to help craft your own projections based on the problems you are willing to accept and
the synergies you see. These projections will allow you to value the target and determine whether you
want to proceed. The projections should also reflect how you intend to fund the acquisition so you
can determine whether the deal is accretive and if so, by what potential. Never forget, the LOI is (or
should be!) nonbinding. You can still say “No.”



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Finally, you should have your attorneys develop a draft purchase agreement (PA) and any additional
agreements, such as employment agreements, covenants not to compete, leases owned by the seller,
etc.

One of the many areas for detailed consideration is the representations and warranties that you
expect the seller to make. These issues may address legal issues, environmental issues, warranty
claims, accounts receivable, tax matters, employee matters, liens, asset ownership, etc. Additionally,
you are looking for the seller to warrant on the accuracy of the data and full disclosure with an
indemnification clause if there is a breach.

A final note to this step, the PA is only signed at closing. The process of negotiating and finalizing
the PA is often a long, time-consuming process.

The closer you come to closing the deal, the more frantic the pace becomes. Due diligence and
response from the seller can be quite intense at this time. Negotiating the PA becomes equally
intense as you use due diligence findings to renegotiate previously agreed upon and accepted
provisions of the deal.

Frequently, changes may occur in the price; terms of payment; use of escrows including amount and
timeframe; definitions of key terms such as working capital, working capital target, debt, cash,
purchase price adjustments (e.g., minimum net worth), post closing adjustments, etc. You may find
yourself changing the wording of specific representations and warranties as well.

Closing
Closing can take all day. Plan to meet with your advisors and the target (and their advisors) to sign all
the documents and effect payments. In some cases, the actual purchase may not be effective until a
certain date, so the only payment might be a deposit. In this case, the balance of funds due would be
paid on the effective date of the sale.

Planning for success
One task that should begin early in the due diligence process is integration planning. Many
acquisitions fail because the buyer does not take the appropriate time to address integration,
including how the buyer will manage the seller‟s entity. It is important to remember that the target
was selected because it supported the corporate growth strategy. That strategy should be used as a
guideline for integration planning.

Many variables impact integration planning. Will the business continues to operate at its existing
location, or will it be consolidated into your facilities? There are information technology issues,
compensation and benefit issues, consolidating of administrative operations such as accounting,
financial, human resources, and many other operating issues to be addressed by a comprehensive
integration plan.



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You also need to consider the management of the newly acquired entity. To who and how will it
report? Will you as the buyer insert someone from your company to manage the company and help
with integration?

Due diligence will uncover weaknesses that need to be addressed – perhaps people issues, capital
expense items, or contract re-negotiations. The due diligence team should deliver an integration plan
that isolates specific actions for the first 100 days, and then summarizes longer-term integration
issues.

Cross-border deals
The international marketplace will drive many deals in the near future. According to Ian Smart,
global leader of M&A services for Grant Thornton International, “Many privately held businesses have
quietly recognized that, in an increasingly competitive, changing and challenging environment, well-thought-out and
carefully executed cross-border M&A transactions can boost the value of their businesses.” And as the previously
mentioned Grant Thornton International study noted, the appetite for M&A remains strong in many
economies.

So how does globalization impact the discussion presented above? In a publication created by Grant
Thornton last fall, we provided several tips addressing M&A cross-border transactions such as:
        Spending time getting to know the target‟s country, including local customs and practices, as
         well as the target itself – spend extra time on strategy formulation
        Establishing personnel relationships with individuals both at the target with local business
         people and professionals
        Making sure there is a prior agreement that is included in the LOI on how the transaction
         value will be determined
        Allowing for more time and resources – many foreign companies do not operate with the
         same level of documentation to which Americans are accustomed, nor a similar level of
         computerization (many records are still paper or Excel type files)
        Being aware of legal differences and corrupt or deficient legal compliance – involve local
         attorneys
        Being prepared for unexpected legal and regulatory changes
        Adapting your approach to a deal mindful of local business practices and norms – this is true
         for conducting due diligence and later as owner
        Understanding what potential remedies exist in the event of a dispute – Americans are
         accustomed to relying on courts, which isn‟t necessarily the case in many foreign countries
        Carefully examining pension and workforce issues – these can be costly and again are often
         very different from what American companies are used to doing
        Being prepared for „vendor due diligence‟ rather than being allowed to do in-depth due
         diligence – this is due diligence paid for by the seller where the report is provided to the
         potential buyer(s) in lieu detailed due diligence
        Integrating top management quickly – use a swift approach to consolidating
         management/leadership (the first 100 days also applies to cross border deals)



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        Quickly and efficiently consolidating information technology systems, especially financial
         reporting and identifying other core issues for integration

Conclusion
Despite their complexity, mergers and acquisitions remain one of the most popular techniques for
successful business interested in sustaining or enhancing growth. It‟s always important to remember
that the foundation of any acquisition is your firm‟s strategy, and a clear understanding how the
potential purchase will support it. You must begin with a clear knowledge of where you want your
company to go, your projections for organic growth and the gap that remains to be filled though
acquisitions.

Once you‟ve decided to take the purchase plunge, we urge you to remember that acquisitions –
especially acquisitions done right – are no easy task. Whether you are a first time acquirer or a
seasoned buyer, following a predictable series of well-defined steps will help you ensure a successful
future for your expanding enterprise.



If you would like a copy of Grant Thornton International’s report on Mergers and acquisitions: opportunities for global
growth, or the Bridging the global, cross-border transaction gap white paper, please email Bryan Besco, Marketing
Manager, at Bryan.Besco@gt.com.

William P. Erfourth is a Principal in Grant Thornton’s Transaction Advisory Services practice located in Detroit,
Michigan where he specializes in cross border deals for strategic or corporate buyers. He can be contacted at
William.Erfourth@gt.com.




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