First-timer insights: What I've learnt from over 30 Transactions

Embarking on a merger and acquisition (M&A) journey is as exciting as it is daunting. The strategic decision to acquire another business marks a significant milestone in a company’s growth story, but often raises the initial question – what comes next?

As a tech founder and CFO, I’ve led over 30 M&A transactions totalling over £100 million, as well as being the CFO in one of the tech sector’s largest Private Equity buyouts of a founder-owned managed service provider.

Yet, despite these experiences over my career, I can still vividly recall the heart-pounding nerves and uncertainty I felt during that first deal.

Which is why I wanted to share some of the most important things I’ve learned along the way for those considering starting out.

Identifying and approaching off-market targets

Much of my success in finding target companies has come from seeking out off-market opportunities – i.e. approaching potential targets directly. The key to identifying these lies in actively looking for the capability gaps within your organisation that you ideally want to fill. You can do this by:

• Creating an ideal criteria matrix: Take the time upfront to define the specific capabilities, market segments or geographic regions you’re interested in acquiring. This matrix will act as your guiding light in identifying suitable targets.
• Run a targeted campaign: Conduct a targeted outreach campaign based on your criteria matrix. Many corporate finance companies specialise in this and can provide valuable assistance if time is an issue. Choose a company with a proven track record to ensure fruitful conversations from the start.
• Qualify your targets: Ensure the companies you connect with meet your predefined criteria. This will make initial conversations more productive and set a strong foundation for trust and rapport.

Building trust in a competitive sale process

I’d argue that THE most important element for success is to build trust and rapport with the sellers. Founders understandably have an emotional attachment to the businesses that they poured their hard work, sweat and tears into. They want to be certain that its new owners will treat it right.

• Establish personal connections: Remember, founders sell to people, not businesses. Building a genuine rapport can often be the deciding factor in a competitive sale process.
• Demonstrate commitment: Show that you’re committed to preserving the legacy of their business. This reassurance can go a long way in fostering trust.
• Know when to walk away: If you can feel that there is a tension or lack of trust – as hard as it can be – in most cases it’s better to walk away as the chances of reaching a completion is vastly reduced.

Calculating your bid price and final offer

Unlike many M&A buyers, I believe in ensuring that the price offered is both achievable and likely to be transacted at 100%. Avoiding last-minute price alterations helps maintain trust and credibility and avoid tarnished reputations.

Here’s how to get it right:

• Set a realistic price: Ensure that your bid price is already acceptable to both your funders and your Board alike. An achievable price is better than an inflated one that later needs adjustment.
• Avoid bidding wars: Getting drawn into bidding wars can inflate the purchase price beyond reasonable limits. If a seller is looking for the highest price rather than a fair one, it may signal future issues or fall throughs at the later stages.
• Transparent negotiations: Be upfront about your pricing strategy. Any hint of a price reduction late in the process can erode trust instantly, especially with inexperienced sellers, as many founders are.

Structuring your M&A financial modelling and integration team

Effective financial modelling and a robust integration plan are vital, and when modelling an acquisition its best to work backwards.

• Start with the end in mind: Define what the integrated business and its workforce, tools, and processes need to look like to perform so you have a clear idea of what you want to look like.
• Develop and execute an integration plan: Develop an integration plan that includes moving systems, relocating staff, and creating cost synergies that will help you reach the end state. Budget for dual running in most cases, but always end at the place you knew at the start was correct. Don’t put off all the heavy lifting, as the value in bringing the synergy plan to 100% completion is nearly always under valued. On exit those final synergies will repay you heavily.

Raising the right debt at the right price

Raising capital for M&A can vary widely based on the maturity of your business:

• Startups/Early stage: Mainstream banks may not be accessible at this stage, so growth capital funders are often the best option.
• Established businesses: Mainstream banks typically offer loans at 3 to 3.5x EBITDA, with some funds extending this range to 4.5 or even 5x at a stretch.
• Balancing debt and equity: While debt is preferable due to non-dilution, ensure repayments are affordable. Having a small equity cheque alongside debt can provide necessary financial flexibility and stability.

Getting internal and external shareholder buy-in

It’s extremely important to take your investors on the journey with you. It’s no good getting offers out to sellers, to find that the Board don’t buy into your vision and you need to retract.

• Open communication: Keep all stakeholders informed and engaged throughout the process to avoid last-minute surprises.
• Build trust: By putting your offer across as Board Approved and subject only to Funder permissions if applicable. This demonstrates organisational alignment and commitment.

Post-Acquisition KPIs and Ensuring Financial Success

Invariably, post-acquisition, it’s rare for everything to go 100% as planned. Here’s how to stay on track:

• Immediate financial oversight: Obtain access to and link the finance systems within 48 hours of completion. This allows your finance team to quickly understand the revenues and costs of the business.
• Flexible execution: While the integration plan should be flexible in how it is executed, the end goal number must be met. Ensure your integration team understands this crucial target.

Remember, the ultimate goal is to create a synergistic business that drives long-term success. With careful planning and execution, your first M&A endeavour can be a transformative step for the future of your business.