Acquisition opportunities arise through design or by chance. As your company profile improves, bigger players may approach you if they perceive a complimentary relationship. That could be a large competitor, who has been losing key accounts to you. An OEM or strategic partner, who observes significant sales resulting from the partnership, may look for vertical integration.
It is also possible to plan for an acquisition once your business has reached a certain scale. The points made above can work in reverse – you can judge which competitor, partner or someone in an adjacent space can benefit from acquiring your product. As part of your roadmap, you can then align your positioning, offerings and client base to be complimentary. By winning deals with some overlap in clients, you can work towards some kind of sales, SI or OEM relationship. After creating a network of senior level contacts inside that organization, you can make an overture for a strategic investment or outright acquisition.
The first contact must be at a high level, preferably CEO, directly or through trusted contacts. Once initiated, an M&A negotiation proceeds like an investment deal. The acquirer has to find your product, leadership team, client base, current revenue and growth potential attractive. You must be convinced that the buyer is the right one in terms of business prospects, culture, and management team.
Negotiations have to proceed in strictest of confidence. The risk is higher for the smaller company – any leak can impact market confidence in your future if the deal falls through. After signing a mutual NDA, both sides share high level revenue and profitability numbers. You may have to part with much more information than the buyer if you are much smaller. Get clarity on mutual synergies in clients and products and future combined roadmap. M&A makes sense if 5 and 2 can result in something more than 7.
The first one or two meetings are usually decisive. It is quickly apparent whether both sides have a similar vision and share similar values. Cultural fit can make or break the deal. With two CEOs used to having their own way, a lot depends on their rapport. M&A deals have fallen through because of ego issues between leaders.
If there is good business synergy, the acquisition amount and terms are discussed. Once there is a handshake on valuation and broad merger principles, a term sheet is signed.
In M&A too, the buyer will assign a team to verify all claims, do customer checks, and examine potential risks or liabilities related to tax, loans, IP, client defaults etc. Any major risks or liabilities discovered during this review can result in the deal falling through or change the valuation. If all goes well, both sides work on a comprehensive agreement to conclude the deal.