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Deloitte Private
Ask first, shoot later.
Improve your
M&A marksmanship
with these
12 acquisition
must-dos
So, you’ve decided to pursue an acquisition
You’re poised to strike a deal.
Market volatility, depressed
commodity prices, and a low
Canadian dollar are no deterrent
– you see the opportunity while
others sit on the sidelines.
You have one or more targets in
your sights, and your finger is on
the trigger.
There’s really only one
question to answer . . .
Are you ready?
Seizing the right opportunity is hard work. A successful M&A deal depends
on many critical factors. Are you confident you have:
Easier said than done? Maybe.
Here’s how to do it . . .
Identified the right target that fits
within your M&A strategy?
Secured the appropriate resources
and expertise to execute the deal?
Devised a sure-fire plan to
seamlessly integrate the target?
1. Tone from the top
A clear M&A strategy will articulate your growth priorities and how you will
succeed within your competitive landscape while still staying true to your
overall corporate strategy.
Your M&A strategy will drive your investment approach and filter throughout
your M&A lifecycle from target screening through to due diligence and
integration.
Now let’s get a bit
more disciplined
on this. . .
2. There are plenty of targets in the gallery
A structured approach will make sure
you stick to your strategy, define your
acquisition criteria, and find the right fit.
Patience is a virtue, but so is decisiveness.
Which is not to say you
shouldn’t still . . .
While it may be tempting to hold out until conditions seem to guarantee you’ll
hit the bull’s-eye, good deals are hard to find.
3. Approach with caution
Now that you’ve found the right
target, full steam ahead, right?
Not exactly.
Slow down – check your blind
spots and start gathering the
right information. Get to know
the company, the upsides and
the downsides, and start to
assess the indicative value as a
baseline for negotiations.
However, a lot of
targets move – so don’t
wait too long before
you pull the trigger . . .
4. Zero in on the right price
You’ve done your initial homework and now you need to make some
important decisions. What is this business worth? How will you fund the deal?
Identify potential synergies early, but
be careful not to let them impact your
negotiating mindset and position. While
reflecting potential upside, synergies are
hard to achieve and are typically diluted
due to costs and execution risk.
Also understand the seller’s preferences and expectations. You may need to
be creative to bridge value gaps through vendor notes or earn-outs, which
can also be used to mitigate risk. And you might need to consider raising
funds with a bank or private equity firm in order to facilitate the transaction.
The point is: be clear on
what you are buying and
what you are paying.
Put a strong offer on the
table to get to the next
stage, but leave room for
negotiation . . .
4. Zero in on the right price
	 (Cont.)
5. Time may not be on your side
Congratulations – your letter of intent is signed but now the clock starts
ticking and there’s much work to be done before your exclusivity expires.
This will likely include integration planning, which shouldn’t be left until
it’s time to actually integrate.
Due diligence, meanwhile, needs to be swift,
but you only have one shot at getting it right.
Do you have the right team to execute in a short
window? Is your diligence coordinated across
multiple work streams to address key risks and
value drivers, and to validate your deal
assumptions . . .?
5. Time may not be on your side
	 (Cont.)
Diligence execution is within your control –
don’t let an incomplete process get in the
way of a successful transaction.
Now you need to run a few things to
the ground . . .
6. Scrub thoroughly
The target’s numbers may look clean
at first glance but they need a proper
scrub before you let them hang to dry
in your model.
The quality of the company’s earnings
needs to be carefully scrutinized.
Private businesses often have related
party transactions, owner-manager
compensation, and other expenses
that may not represent market value.
6. Scrub thoroughly
	 (Cont.)
After spending time in the weeds,
you still need to look up and out . . .
You need to strip away all the noise to
truly understand the target’s normalized,
sustainable earnings. Equally important is
sufficient rigor to uncover any hidden costs
or contingencies that could otherwise spell
very unpleasant post-deal surprises.
Understanding the working capital
requirement will be key to making sure the
vendors leave you with adequate working
capital to fund the business post-closing
7. Watch out for headwinds
Unexpected changes in the macro environment
like commodity price declines, foreign exchange
fluctuations, disruptive technologies, supply gluts,
and changing demand patterns can wreak havoc.
External headwinds can be a deal-breaker.
Commercial and customer due diligence is crucial
to understanding and quantifying the impact of
market factors and customer spending decisions
on the target’s financial performance.
Now you need to think about
getting the house in order . . .
8. Don’t forget about the tax structure
There is often a natural push and pull between buyer and seller on the
optimum tax structure – you want this to be tax-efficient and to protect against
exposures, while the vendor wants to avoid adverse tax impacts and minimize
transaction tax costs.
8. Don’t forget about the tax structure
	 (Cont.)
Simplifying the corporate structure may also facilitate a smoother transition
and alleviate post-acquisition headaches. On the other hand, a more
complex structure may help you maximize the after-tax return on your overall
investment.
But if you thought tax
was hard, this will be
harder . . .
Agreeable middle ground
can be negotiated – the
challenge is to find the
right balance.
9. Making the hard call
Retention of key management and
employees is paramount. As the buyer,
do you have the resources you need
to manage this new business? Does
the target? What about when you
put the two teams together? Should
organizational restructuring be on the
table? How will you ensure alignment
of goals with top talent?
9. Making the hard call
	 (Cont.)
These questions and more must be
asked – and answered. You need
to be confident you will have the
management capabilities required post-
transaction. Use the best both sides
have to offer – but be wary of potential
redundancies, change of control costs,
and other conflicts.
Tough choices are often part of the
game. Expect to make them.
Now it’s time to make sure everyone
is aiming in the right direction . . .
10. Get your stakeholders on board
You’re getting close, it’s time
to put pen to paper . . .
You must ensure the majority of your stakeholders – family members,
management teams, other shareholders, key customers, etc. – are out of the
line of fire and supportive of any deal you’re considering.
This alignment is crucial. Dissenting views and dysfunctional groups should
be managed in advance. Avoid any eleventh-hour surprises that may put the
deal in jeopardy.
11. The last line of defense
All of your due diligence findings should be captured in the
negotiation of the purchase agreement. Purchase price adjustment
mechanisms, indemnities, representations, and warranties
can all act as safeguards against potential exposures.
Traditional completion accounts will have adjustment mechanisms
for net working capital and net debt. You need to invest the time
to properly assess historical trends, set definitions, and negotiate a
working capital target to ensure you are properly compensated for
any working capital shortfalls or avoid overpaying in the event of
higher than normal levels at close.
Don’t break out the champagne just yet,
though. One more step to go . . .
12. Bringing it all together
The final stage in a transaction is the most imperative. A poorly planned and
managed integration is the most common reason for deal failure.
The complexity of Day One and end-state integration will vary depending
on the target and whether the acquisition is a tuck-in or transformational.
Synergies and any step-up costs also need to be carefully considered to assess
how they might impact your strategy.
Solid execution of your plan during those ever-
critical first 100 days demand your team’s full
attention in order to achieve the value you expect.
Looks like you’re getting
the handle on this . . .
Now you’re getting closer to preparing
for a successful close
For more information . . .
After all, even ‘friendly
fire’ has potentially dire
consequences.
So, take a little care and
pay attention to the details.
When you do, your aim is
more likely to be true.
When you’re finally ready to shoot, you want to be confident you’re going
to hit exactly where you’re aiming.
Contact us
deloitteprivate@deloitte.ca
www.deloitte.ca
Deloitte, one of Canada’s leading professional services firms, provides audit, tax, consulting,
and financial advisory services. Deloitte LLP, an Ontario limited liability partnership, is the
Canadian member firm of Deloitte Touche Tohmatsu Limited.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company
limited by guarantee, and its network of member firms, each of which is a legally separate and
independent entity. Please see www.deloitte.com/about for a detailed description of the legal
structure of Deloitte Touche Tohmatsu Limited and its member firms.
© Deloitte LLP and affiliated entities. 16-4175M

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Ask first, shoot later. Improve your M&A marksmanship with these 12 acquisition must-dos

  • 1. Deloitte Private Ask first, shoot later. Improve your M&A marksmanship with these 12 acquisition must-dos
  • 2. So, you’ve decided to pursue an acquisition You’re poised to strike a deal. Market volatility, depressed commodity prices, and a low Canadian dollar are no deterrent – you see the opportunity while others sit on the sidelines. You have one or more targets in your sights, and your finger is on the trigger. There’s really only one question to answer . . .
  • 3. Are you ready? Seizing the right opportunity is hard work. A successful M&A deal depends on many critical factors. Are you confident you have: Easier said than done? Maybe. Here’s how to do it . . . Identified the right target that fits within your M&A strategy? Secured the appropriate resources and expertise to execute the deal? Devised a sure-fire plan to seamlessly integrate the target?
  • 4. 1. Tone from the top A clear M&A strategy will articulate your growth priorities and how you will succeed within your competitive landscape while still staying true to your overall corporate strategy. Your M&A strategy will drive your investment approach and filter throughout your M&A lifecycle from target screening through to due diligence and integration. Now let’s get a bit more disciplined on this. . .
  • 5. 2. There are plenty of targets in the gallery A structured approach will make sure you stick to your strategy, define your acquisition criteria, and find the right fit. Patience is a virtue, but so is decisiveness. Which is not to say you shouldn’t still . . . While it may be tempting to hold out until conditions seem to guarantee you’ll hit the bull’s-eye, good deals are hard to find.
  • 6. 3. Approach with caution Now that you’ve found the right target, full steam ahead, right? Not exactly. Slow down – check your blind spots and start gathering the right information. Get to know the company, the upsides and the downsides, and start to assess the indicative value as a baseline for negotiations. However, a lot of targets move – so don’t wait too long before you pull the trigger . . .
  • 7. 4. Zero in on the right price You’ve done your initial homework and now you need to make some important decisions. What is this business worth? How will you fund the deal? Identify potential synergies early, but be careful not to let them impact your negotiating mindset and position. While reflecting potential upside, synergies are hard to achieve and are typically diluted due to costs and execution risk.
  • 8. Also understand the seller’s preferences and expectations. You may need to be creative to bridge value gaps through vendor notes or earn-outs, which can also be used to mitigate risk. And you might need to consider raising funds with a bank or private equity firm in order to facilitate the transaction. The point is: be clear on what you are buying and what you are paying. Put a strong offer on the table to get to the next stage, but leave room for negotiation . . . 4. Zero in on the right price (Cont.)
  • 9. 5. Time may not be on your side Congratulations – your letter of intent is signed but now the clock starts ticking and there’s much work to be done before your exclusivity expires. This will likely include integration planning, which shouldn’t be left until it’s time to actually integrate. Due diligence, meanwhile, needs to be swift, but you only have one shot at getting it right. Do you have the right team to execute in a short window? Is your diligence coordinated across multiple work streams to address key risks and value drivers, and to validate your deal assumptions . . .?
  • 10. 5. Time may not be on your side (Cont.) Diligence execution is within your control – don’t let an incomplete process get in the way of a successful transaction. Now you need to run a few things to the ground . . .
  • 11. 6. Scrub thoroughly The target’s numbers may look clean at first glance but they need a proper scrub before you let them hang to dry in your model. The quality of the company’s earnings needs to be carefully scrutinized. Private businesses often have related party transactions, owner-manager compensation, and other expenses that may not represent market value.
  • 12. 6. Scrub thoroughly (Cont.) After spending time in the weeds, you still need to look up and out . . . You need to strip away all the noise to truly understand the target’s normalized, sustainable earnings. Equally important is sufficient rigor to uncover any hidden costs or contingencies that could otherwise spell very unpleasant post-deal surprises. Understanding the working capital requirement will be key to making sure the vendors leave you with adequate working capital to fund the business post-closing
  • 13. 7. Watch out for headwinds Unexpected changes in the macro environment like commodity price declines, foreign exchange fluctuations, disruptive technologies, supply gluts, and changing demand patterns can wreak havoc. External headwinds can be a deal-breaker. Commercial and customer due diligence is crucial to understanding and quantifying the impact of market factors and customer spending decisions on the target’s financial performance. Now you need to think about getting the house in order . . .
  • 14. 8. Don’t forget about the tax structure There is often a natural push and pull between buyer and seller on the optimum tax structure – you want this to be tax-efficient and to protect against exposures, while the vendor wants to avoid adverse tax impacts and minimize transaction tax costs.
  • 15. 8. Don’t forget about the tax structure (Cont.) Simplifying the corporate structure may also facilitate a smoother transition and alleviate post-acquisition headaches. On the other hand, a more complex structure may help you maximize the after-tax return on your overall investment. But if you thought tax was hard, this will be harder . . . Agreeable middle ground can be negotiated – the challenge is to find the right balance.
  • 16. 9. Making the hard call Retention of key management and employees is paramount. As the buyer, do you have the resources you need to manage this new business? Does the target? What about when you put the two teams together? Should organizational restructuring be on the table? How will you ensure alignment of goals with top talent?
  • 17. 9. Making the hard call (Cont.) These questions and more must be asked – and answered. You need to be confident you will have the management capabilities required post- transaction. Use the best both sides have to offer – but be wary of potential redundancies, change of control costs, and other conflicts. Tough choices are often part of the game. Expect to make them. Now it’s time to make sure everyone is aiming in the right direction . . .
  • 18. 10. Get your stakeholders on board You’re getting close, it’s time to put pen to paper . . . You must ensure the majority of your stakeholders – family members, management teams, other shareholders, key customers, etc. – are out of the line of fire and supportive of any deal you’re considering. This alignment is crucial. Dissenting views and dysfunctional groups should be managed in advance. Avoid any eleventh-hour surprises that may put the deal in jeopardy.
  • 19. 11. The last line of defense All of your due diligence findings should be captured in the negotiation of the purchase agreement. Purchase price adjustment mechanisms, indemnities, representations, and warranties can all act as safeguards against potential exposures. Traditional completion accounts will have adjustment mechanisms for net working capital and net debt. You need to invest the time to properly assess historical trends, set definitions, and negotiate a working capital target to ensure you are properly compensated for any working capital shortfalls or avoid overpaying in the event of higher than normal levels at close. Don’t break out the champagne just yet, though. One more step to go . . .
  • 20. 12. Bringing it all together The final stage in a transaction is the most imperative. A poorly planned and managed integration is the most common reason for deal failure. The complexity of Day One and end-state integration will vary depending on the target and whether the acquisition is a tuck-in or transformational. Synergies and any step-up costs also need to be carefully considered to assess how they might impact your strategy. Solid execution of your plan during those ever- critical first 100 days demand your team’s full attention in order to achieve the value you expect. Looks like you’re getting the handle on this . . .
  • 21. Now you’re getting closer to preparing for a successful close For more information . . . After all, even ‘friendly fire’ has potentially dire consequences. So, take a little care and pay attention to the details. When you do, your aim is more likely to be true. When you’re finally ready to shoot, you want to be confident you’re going to hit exactly where you’re aiming.
  • 23. www.deloitte.ca Deloitte, one of Canada’s leading professional services firms, provides audit, tax, consulting, and financial advisory services. Deloitte LLP, an Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. © Deloitte LLP and affiliated entities. 16-4175M