So you’re facing acquisition talks. Great! But, are you ready?
Preparing for a potential acquisition should, ideally, happen before a real acquisition ever becomes a looming possibility. Common wisdom says that you should have everything organized so you can provide all the necessary requested documentation.
Okay, but what does this mean exactly? What do you really need to do to have all of your ducks in a row?
Read on for more information about the acquisition due diligence process, what you need, and how to prepare.
Get your financial statements and accounting records in order — The potential acquiring company is going to dig deep into your historical financials. Way deep. You’ll need to prepare pro forma statements at both a summary and detailed level. You also need to have supporting schedules for all of your asset and liability accounts as well as supporting documentation for your revenue and expense accounts.
Providing the acquiring company with accurate financial projections is essential. Depending on the acquiring company, you may be required to provide them with:
- Cash forecast — Weekly predictions of your company earnings and obligations: cash flow in and out.
- Short-term projections — Generally predicts for the upcoming year, with updates weekly to monthly. These short-term projections lay the groundwork for long-term projections.
- Multi-year plans — Three- to five-year forecasts that give the acquiring company insight into your company’s potential.
Get a financial audit performed by a CPA firm — A financial audit is the legal verification of your financial statements. Essentially, it means that a financial professional has reviewed your financial statements and given them the stamp of approval that says. This extra step will give acquiring companies confidence that the statements you have presented are fair representations of your financial condition.
Get a financial valuation provided by a valuation firm — Valuations are necessary for many reasons, but they are essential for acquisition transactions. There are a variety of models for valuation of financial assets (for more details, check out my post on Generating Your 409A Valuation), but a professional valuation firm can help you to provide a spot-on valuation that will stand up to a buyer scrutiny.
Decide whether or not you want to hire an investment banker — There are pluses and minuses to hiring an investment banker, which I will address in a future post. For now, if you do decide on hiring an investment banker, take care to choose a reputable and experienced banker who has a solid understanding of capital financing.
Of even greater importance, any potential investment banker needs to have an interest in, and good understanding of, your business — both your products/services and your clients. The banker needs to take the time to get to know your goals, strategies, strengths, and challenges. And he needs to be prepared to help you to navigate your way around any bumps you may encounter on the road to acquisition.
Make sure all of your legal information is in order — You should work with a law firm to get a standardized set of company formation docs, employee agreements, stock plan agreements, and other necessary legal documents. The investment in a reputable law firm will pay back tenfold in the time and hassle you’ll save from dealing with the acquiring company’s counsel.
You may have seen a common trend throughout this advice: hire professionals. While you may think that you can handle the due diligence process in-house, this is a big mistake. Acquisition talks require a huge investment of time and energy. Even if you have a strong core team, it still makes good sense to lighten their due diligence load by bringing on an outside “dream acquisition team.”
This may seem like an unnecessary cost, but it’s actually an important risk mitigation strategy. Acquisition is exciting, but it’s a process fraught with potential difficulties. How many people on your team have gone through an acquisition as compared to a professional legal team or investment banker or accountant? This is one of those times when you need to turn to professionals for support — and to give you the time you need to continue to focus on the actual day-to-day running of your company.
