It is the act of one company taking over or acquiring a controlling interest of another company by means of an asset purchase or a stock purchase. Investors often look for companies that are likely acquisition candidates such as family businesses or divisions of larger companies. Acquisitions often give the acquiring company greater market reach or product breadth. The end result is to grow the business in a quicker and more profitable manner than normal organic growth would allow.
Acquisitions are vessels of corporate growth, creating major growth steps. Through one acquisition, a buyer can achieve three to five years of organic growth in one single step. Often, acquisitions bring a new customer base that is strategic for the acquiror. The new customer base brings new potential sources of revenue. Additionally, an acquisition brings a new set of products or services. This new line-up will strengthen your existing product portfolio and give you more ways to create sales growth. Acquisition success depends on the strength of the underlying acquisition process, including valuation, structure and operational integration. Acquirors should focus on building discipline into each step of this process. Managing each step involves resource planning across the enterprise and the creation of multi-disciplinary teams. While the front end of the acquisition process is a financial, the more important steps are sales and operationally focused. Strong project management and interdepartmental coordination are needed to ensure success. Companies that bring a holistic integrative approach to managing them usually generate the highest returns. Companies that are overly financial in their approach, that overlook operational planning and integration, usually do not generate attractive returns.
Acquisition Financing is the key ingredient for all deals. There are many forms of acquisition financing including bank loans, term loans, mezzanine loans, equity investment and unitranche loans. Each acquisition financing requirement should be carefully structured to ensure enough capital, repayment flexibility and time for the acquired company to mature. All acquisition structures are unique. Your structure depends on the projected level of growth, investment needed, and time required to make it all happen. It usually takes 3 to 4 years for the value to be realized from the acquisition, making it a long-term play. This fact demands a conservative approach to capital planning, as things usually take longer and may be more expensive than expected. Acquisition structures should be designed to give you ample cushion if things take longer than expected. For example, cash flow-based structures such as mezzanine loans, allow a borrower 3 to 5 years before any principal payments are due. This provides a huge liquidity benefit over a bank loan which requires principal payments right away. This structure also gives you a large time cushion to adjust the operational plan, if the company goes off track. Acquisition financing, when structured and sourced through an experienced advisor, can be a huge difference maker in the success of your deal.