Acquisition Planning in Business Explained
In today’s business world, there are more large-scale acquisitions than ever before. In a competitive and increasingly financially constrained environment, businesses across all industries are pursuing new ventures. However, instead of building from scratch, many businesses choose to acquire existing operations from competitors or other providers. From increasing market share to expanding their portfolio, company acquisitions are used as a growth strategy in many ways.
That said, the acquisition process can make or break the future of the new enterprise. This is because acquisition in business can be a complex and lengthy affair. Enter acquisition planning.
What is Acquisition Planning?
In acquisition planning, a company identifies and builds relationships with potential targets for acquisition to determine whether those targets meet their strategic criteria. Companies do this by outlining a comprehensive business acquisition strategy and defining the process involved in implementing it.
What is the acquisition strategy in the merger and acquisition process meant to achieve? By laying out the acquisition processes, criteria for potential targets, timelines, risk management, due diligence, and other factors, the acquirer can determine who meets their agenda, as well as ensure a smooth and uneventful acquisition process.
This process is not to be confused with acquisition planning in the procurement process, which instead sets out a plan for acquiring large or complex items as required by the Federal Acquisition Regulation (FAR).
Business Acquisition Process
Although involved parties try to get to the finish line —or in this case, the dotted line—as soon as possible, the mergers and acquisitions process has many steps and can take anywhere from six months to several years to complete.
Assuming the potential target companies have been identified, a typical deal includes the following steps:
Make an Acquisition Plan
Deciding what you want to achieve enables you to get the most out of the acquisition process. There are many reasons why a company would want to acquire another: Growth into new markets, increase in human resources, geographic growth, and eliminating competition are just a few of the potential reasons.
An acquisition plan must have a clear stipulation of the business case for acquiring the target company.
Build an Acquisition Team
An acquisition team will include relevant executives from the company as well as specialists and analysts. Some of your team’s most essential members should consist of an investment banker, an acquisitions lawyer, and a PR professional.
In this stage, the acquiring party asks the target company to provide information that will enable it to further evaluate the company. This is the stage where documents such as current financials are handed over.
Research and Due Diligence
In addition to reviewing the target company’s files, it is also prudent for the acquiring company to perform its own appraisal. This involves verification or audit of the business to confirm all relevant facts under consideration.
Preparation of Documents
Documents required for the process include:
- Non-disclosure agreement
- Letter of Intent
- Confidential information memorandum
- Indication of interest
- Purchase agreement
First Offer and Negotiations
After the valuations and due diligence have been conducted, and the acquiring company is willing to move forward with the deal, they put their first offer on the table. These terms will then be negotiated until an agreement is reached.
The parties reach a final accord on the purchase agreement. However, this is not the end of the road.
Financial Strategy and Integration
After the parties have negotiated the terms of financing, they will merge the two companies.
Top Acquisition Planning Examples
Some acquisitions are famous for how the process was carried out or the eventual success of the new entity.
One company that has been touted for carrying out successful acquisitions is Amazon. In 2017, it was looking to expand its operations into physical stores and identified Whole Foods as a worthy addition to its portfolio.
Amazon initiated an extensive acquisition plan, starting with a planning process and resulting in integration shortly after ownership transfer took place. Amazon acquired Whole Foods for a total of $13.7 billion in a move that has since proven to be successful.
Another famous example is Facebook’s acquisition of WhatsApp in 2014. At the time, analysts touted $22 billion as too high a price for a relatively new communication app. Today, the acquisition has proven to be a strategic business move, with WhatsApp users reaching 2 billion worldwide.
Pros and Cons of Acquisition Planning
Analysts recommend acquisition planning for many reasons, including the following:
- It gives the involved parties a template for carrying out the process, ensuring no steps are overlooked and all the necessary boxes are checked.
- The process of acquisition planning gives the acquirer time to evaluate the target company, allowing for proper research and due diligence.
- Acquisition planning coordinates all involved parties, from analysts to executives.
- Approaching an acquisition methodically increases the chances of success of the merger.
However, the process can also come with a few downsides. For one, following standard merger and acquisition strategies can be detrimental to the deal if those strategies are misinformed or outlined with little research.
Additionally, the pressure to close a deal quickly can guide managers into premature conclusions that may not be revisited if not included in the plan.
Increase Your Chance of Success
Given a lack of proper planning, mergers and acquisition strategies will fail. Synario can help you gain a prospective view of your company’s financial future with our financial modeling software.
Contact us to learn more about how companies can identify opportunities and mitigate challenges.