How to Optimize the Merger and Acquisition Process

September 11, 2023 Oak Street Funding

merger and acquisition process

Just as no two businesses are exactly alike, merger and acquisition transactions of all types are always unique. However, there are some best practices that all businesses can use to help ensure a smooth transition. A typical merger or acquisition process involves five stages:

1. Identify a target

2. Focus on culture

3. Due diligence

4. Develop a structure

5. Get a solid valuation

 What is the merger and acquisition process?

The merger and acquisition process includes all of the required steps to merge or acquire a company, including identifying a target, focusing on company culture, due diligence, developing a structure, and getting a solid valuation.


1. Identify a target

Whether your company is interested in pursuing a merger of equals, an acquisition, or some other type of business consolidation, the first step is identifying the company or companies you wish to acquire. You may be coming to the merger and acquisition process with a target in mind -- such as having been invited to purchase a friendly competitor -- or you may be looking at a transaction as a way to accomplish longer-term business goals.

For example, you may be a CPA looking to add audit services to your business or you may be looking to expand your RIA firm into a high-net worth area. It is very important to define the characteristics you’d like to see in the business you’d like to acquire. Then, as opportunities arise, you can compare the particulars of potential deals with the characteristics you’ve identified to determine quickly whether a transaction would be a good fit.

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2. Focus on culture

Mergers and acquisitions are rarely painless, and the most common pain points occur when the two companies have markedly different cultures. For example, your business may take an aggressive sales-oriented approach to business, while the company you’re considering is known for a more laid-back approach. Trying to combine very different cultures creates stress and dissatisfaction among employees of both organizations and often leads to greater-than-expected turnover and poorer-than-expected performance. Being able to define your own culture and what you are looking for will help minimize friction points.



3. Do your due diligence

On the surface, a company you’ve targeted for a merger or an acquisition may look attractive, but when you start to dig more deeply, you may discover issues of concern. It could be that key employees have contracts, potentially exposing you to significant payments. It might be the company’s customer base has been shrinking rapidly because of poor service. Or it may be the company’s technology isn’t compatible with yours. The due diligence stage is usually the most important in the merger and acquisition process, so allow plenty of time to examine all areas of the business. Besides operational issues, pay particular attention to the company’s financial health and any legal issues that may come back to create problems.

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4. Develop a structure

Purchasing another business isn't like buying groceries, where a merchant sets a price, and you pay it without a second thought. Just as every transaction is different, there is no standard structure for mergers and acquisitions. Ideally, the structure of the transaction should benefit both the buyer and the seller, but your primary interest should be how it will affect the operations and financial health of your business. And remember that everything is negotiable. If the seller will not budge on the price, you may be able to adjust the payment terms to compensate.


5. Get a solid valuation

When you prepare to sell a house or a car, you probably have a strong sense of what you're willing to accept for it and may even check websites like Zillow® or Kelley Blue Book® to verify whether your expectations are in line with the marketplace. It can be more challenging to pinpoint the value of your business. A major reason many transactions fall apart centers on disagreements about what the business is worth. Beyond issues such as assets and anticipated revenues, there are cost and structural considerations. Some people will point you toward simple rules of thumb in valuation, but a better idea is for the buyer and seller to agree upon a valuation obtained from a third party who has deep knowledge of how businesses like yours are valued. Your attorney or CPA should be able to recommend a source.

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Funding the merger and acquisition process

If you’re contemplating a merger or acquisition in the foreseeable future, it’s likely making it a reality will require access to additional capital. Many businesses think the best approach is to obtain financing from a local commercial bank, but that approach often proves disappointing. You see, most commercial banks are more comfortable with tangible collateral-based lending. Funding for a merger or acquisition is more about increases in revenues. When banks are uncomfortable, they may tack on additional requirements because they do not have in-depth knowledge about your industry.

That’s why a growing number of business owners in your industry have turned to specialty lenders like Oak Street Funding® to fund transactions. Our lending approach is based on future cash flows – intangible collateral - so it’s ideally suited for helping companies like yours turn mergers and acquisitions into realities. To learn more about that approach and how it can help you achieve your goals, talk with one of our loan officers.

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Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.

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