An acquisition happens when another entity purchases most or all of the shares of a certain company. It becomes a tool for people to acquire the control of a particular company legally. By legally purchasing more than 50% of a company’s stock and other assets, the acquiring company can finally make decisions on their newly acquired assets. It also means that the buyer can bypass the approval of the shareholders of the company that they are acquiring.
After an acquisition. both companies ‘survive’, compared to ‘mergers,’ when only one entity would (and should) remain. Unfortunately, some acquisitions don’t go smoothly so both companies end up failing. To ensure your small business acquisition successful, here is what you can do.
VEST PAST OWNER INTEREST IN THE COMPANY
Past Owner’s Role During the Transition Period
A transition period is one of the most crucial parts of a company's acquisition because the change it will bring upon a company may or will cause disruptions and resistance. During this period, the head of the purchasing company must be hands-on in ensuring that every factor involved in the process would smoothly interlock with each other. One thing they need to watch out for is that no serious problems would arise that might cause long-term problems in the post-acquisition period.
There are specific things that should be done during the transition phase in every acquisition:
Establishing a post-merger integration team
Developing a target operating model
Clearly communicating a plan to key stakeholders
Properly introducing the new owner to the customers and suppliers
Focusing the strategy of the newly-bought company.
Just because the company has already been bought does not mean that the past owner will no longer play a role during the transition period. Because they have more knowledge and experience with working with the company, they can play a significant role in the integration team. They already know the stakeholders, suppliers, and customers, making them the perfect person to show the ropes to the new owner.
Owner Carry Notes Receivable
Notes receivable is an asset of a company, bank, or other organization that holds a written promissory note from another party. It is a written promise to receive a specific amount of cash from another party on one or more future dates. The holder of the notes receivable considers the notes as an asset because it has a clear utility through multiple future accounting periods.
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Total Sale Price Calculated on Final Performance
One of the most sensitive parts of any company acquisition process is valuing the company that would be bought. There are times (and probably, most of the time) that the sellers or the owners of the company to be bought set a price that is way higher than its current market value. Since pricing is a very sensitive topic, both parties should not base it on mere intuition, but on specific metrics that can clearly point the proper price of the company.
Specifics should always be the standard and priority of both parties when undergoing the acquisition talks, because it clearly shows transparency and professionalism. Here are the specific metrics that both parties should use to establish fair pricing that they can both agree with.
This valuation, most of the time, is measured in terms of Enterprise Value to cash earnings, and with cash earning expressed as ‘EBITDA’ or ‘Earning Before Interest, Taxes, Depreciation, and Amortization).
The total EBITDA of a company is measured based on the average of recent years, but more commonly, on the company’s most recent twelve months of operational history. This focus on the last twelve months is also known as LTM (Last Twelve Months) or TTM (Trailing Twelve Months)
After both parties have agreed upon the company’s enterprise value, the next step in the process is to calculate its Equity Value.
It is basically an Enterprise Value minus any debt, plus excess cash and cash equivalents. Take note that while the Enterprise Value is the value of the entire company, IT IS NOT the value that a seller gets paid.
After the Equity Value has been ironed out, the last step in the process involves the valuation or deal structure adjustments, which is based on other aspects of the company, viewed from the potential buyer’s perspective.
One thing that must be highlighted in this valuation is it is more objective in nature, compared to the formulaic platforms of Enterprise Value and Equity Value. This is primarily market-driven or financially-derived values, and the deal structure, on the seller’s side, might feel more subjective in nature.
Both the owner of the purchasing company and the past owner must work together to decide on a price that benefits them both.
ENSURE STAFF WILL STAY ON BOARD
It would be an ideal thing to keep the whole workforce of the purchased company unscathed after an acquisition, to prevent any jitters, stress, and even unrest among employees . But the new owner must focus on the bigger picture, with the herculean task of maintaining the growth of the two companies that he/she handles. With this enormous task, the owner understandably has to take measures to make it possible—and it involves laying down some of the workforce.
When laying off staff is unavoidable, the most important factor that owners need to keep in mind is how to do it properly. They should not just go on a layoff spree, but instead set specific standards to ensure that the workforce that would remain would be necessary for a company’s growth.
Consider Additional Benefits to Encourage Commitment
A new owner can take a look at countless ways to improve the commitment of his employees in doing their tasks, but one of the best things he can implement is the additional benefits for ‘star performers.’ Yes, there are employees who can be passionate about their jobs and the company’s vision even if they aren’t happy about the change, making them willing to go the extra mile just to achieve success. But the reality is, these ‘rare gems’ can only be found on a fraction of every company’s workforce population.
Most employees would certainly perform based on how they are being paid and what benefits they are getting. Of all the people in the company, the owner must have the most in-depth understanding of this reality, and it is his job to balance it along with the interest of the company.
Faced with this challenge, an owner must find a way to motivate his staff on going the extra mile, because they will be the igniting force that sparks a company’s growth and progress. Additional benefits based on performance is one of the best ways of doing this, and it both satisfies the needs of a company and its workforce. It’s a win-win situation all around!
Keep Transparent with Staff
Employees, even without verbally saying it, long for genuine transparency from the top boss of the company. Unfortunately, most owners tend to be satisfied with ‘superficial transparency’ because it can be more convenient and less of a hassle for them. But having a one step forward from this usual take on transparency can bring forth a lot of desirable benefits, not only for the owner but for the employees themselves. Take a look at its top benefits:
Transparency leads to trust
Aside from committing themselves physically, one of the most critical roles an employee can play in a company is to engage themselves emotionally. Although they may commit physically and intellectually to their jobs, not engaging themselves emotionally is a sign that what they are doing is not close to their hearts.
An employee can only be emotionally engaged to what he is doing if the company presents a clear reason why they should be doing the task. Benefits and pay raise will only scratch the surface, but it won’t reach their hearts.
What a company, and ultimately the owner, needs to do is to express sincere transparency among employees about the big and small decisions of the company that can affect their everyday work life. It’s a way of saying: “May I know what you think of this?” Being transparent with company decisions also serves as a barometer on how well it fares with your workforce. It gives them a clear message that they are an important part of the company.
Transparency leads to employee empowerment.
An employee can certainly be more motivated to accomplish a task if they know why it was assigned to them. Anyone can feel like a mere pawn if they were handed a task without even knowing why they were chosen. Yes, it’s part of their job, but reminding them that they are capable of accomplishing that can go a long way. Also, it should be clear how their efforts fit into the big picture of the company so they can appreciate what they are doing even more.
MAP OUT THE ORGANIZATION CHART
Establish Which Employees Fit Where
Have an ‘advance screening’ way before the acquisition by performing a background check of a company’s employees on LinkedIn (which clearly shows their skills and work history) and Social Media (which shows how well-rounded they are). This is not to say that this should be your only basis of judging your future employees, but it can give you a clearer idea of where to place them properly in the future. Once you officially acquire their records from the company, you now have the missing pieces of the puzzle to complete the whole picture.
A business owner must place the right people in the right places because it is crucial for the performance of the company. The earlier an owner starts screening his future employees, the better he can contemplate on where to place them better, or make the right decision to keep them where they were.
Will You Need To Hire Anyone?
Hiring additional employees depends on your long-term plan for the company you are acquiring. It depends on the following factors:
Are the number of employees enough to support the company?
Do the employees already possess the skills that you need?
Is there a need for a new department?
Ideally, a company would want to hire as few people as possible while maintaining and even improving its operations. When the owner has all the complete details of the employees, they can decide to hire additional ones.
IMPLEMENT YOUR PLAN TO GROW BUSINESS (YOU SHOULD’VE HAD A PLAN BEFORE BUYING THE BUSINESS)
It’s an open secret, but, more often than not, an entrepreneur or a businessman that expresses an interest in acquiring a company already has a long-term plan on its growth down to its last detail. Adjustments (few or major) will be made once every necessary detail about the company is legally theirs. Establishing a detailed, long-term plan is one of the prime skills that a business owner has—and you should, too.
The company you plan to acquire should evolve like a time-lapse video in your mind; you must know where to take it, and how. Having a clear end goal in mind is important because it will become the primary focus of all your efforts, time, and finances.
But aside from having a clear goal, a truly skilled business owner knows how they can achieve it. It’s an enormous task that takes years. The following list can help you get on the right track to bring the company to new heights of success:
1. Study The Competition Thoroughly
One of the clearest assets of having two (or more) companies is that an owner can use both their resources and assets to improve. In that way, both can be more equipped to wrestle any competition out of the way.
To know what areas a company needs to improve in, you need to study what competition a company is in.
Does it have a clear business plan, a strong workforce, and enough resources to compete with its bigger rivals? Have a closer look and study the latest demands of the market; maybe the company you are planning to acquire has some missing keys needed to satisfy that demand? No matter how big a company is, there is still a lot of room for improvement, especially in their manner of competing.
2. Build A Sales Funnel (Or Build A Better One)
A sales funnel works like a “well-planned maze” where a company effectively leads customers on a series of phases that would ultimately result in a product purchase. It has a very big role in generating revenues for the company, so it is natural to establish or improve the sales funnel of your company or the company you’re planning to acquire.
If you own a company that already has an effective and solid sales funnel, you’ll have a blueprint to use as a reference when your other company will need one, too. But be careful when you apply the same sales funnel to another company, as each company has unique needs. In most cases, your sales funnel needs to be tweaked.
3. Keep an Eye for New Opportunities
Opportunities are all over the place, and they only manifest for people who keep a keen eye out—which is what you should be doing as the head!
Even if you have enough knowledge of the demographics that your company serves, take one step further and study it even better, and you’ll see there is more to discover. As I’ve said, opportunities are everywhere, from distribution channels, direct competitors, and even foreign markets! An owner would not run short of ‘rooms’ to look at for improvement.
One important reminder though: a truly skilled leader should be equally sharp about what is truly necessary. The truth is that not all opportunities are actually assets. Some can be a liability, turning into extra baggage for your company in the long run.
A company acquisition is already an enormous task in itself, but when you add “smooth transition” to the equation, then things certainly can get more complicated. That is why a business owner must have a clear understanding of the whole process of acquisition. A successful purchase starts way before and continues long after the actual acquisition. And with all the various and complicated tasks involved, you need to work wisely with your staff and resources to pull it off.