BUILDING THE ACQUISITION TEAM: 5th article in the series on M&A

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No one person is likely to have expertise in all the areas required to make a thorough evaluation of business prospects.  You need to bring advisors on board, early on, whether as part-time consultants or as employees, to provide you with the expertise you will need to effectively screen different business opportunities.

Why You Need a Team

Some books may recommend that you take shortcuts in screening business opportunities.  I firmly believe, based on personal experience and available research, that you cannot afford to cut corners in obtaining sound advice before closing the deal. If you do, you may save several thousand dollars in the short run, but if you plan to invest your life savings or other large sums of money into what proves to be a money-losing proposition, you have lost much more money in the long run taking such short cuts.

If you develop an initial business plan that clearly spells out what you want to do and how you want to do it, and establish appropriate credibility, then you are more likely to raise some of the money you need to build the team.  It’s an issue of approach, not one of sophistication.

Financing the Team

In the beginning you are not likely to get a bank loan for your search unless you take out a personal loan.  Start with family, friends or acquaintances who are relatively easy to access. They will network you further, and then, you might go to professional institutions.  Generally, start-up costs to cover the screening and evaluation costs of different business prospects comes from an immediate circle of friends.

Most consultants are unwilling to work for free at this stage but they might be willing to give you a lower rate.

 

Characteristics of a Good Team

A good team is made up of several people who have their own area of expertise but who function together as a team.  each of them looks at their own area of competence and integrates it in cross-functional discussions.  A good team is composed of competent individuals who understand the importance of working together with others.

Beware of the trap that many entrepreneurs fall into that they want to do it all by themselves.  The risk is that you don’t know what you are doing. Your venture has a much higher risk of failure than when you involve professionals to help you evaluate prospects, even though your up front expenses are higher. An entrepreneur makes a big mistake who thinks he can handle everything without expert help.

You should not proceed to buy a business if you cannot afford a lawyer or an accountant who can evaluate the appropriate aspects of the business.

The Attorney: Your First Player

Very few deals can get by without the services of an experienced, competent lawyer.  The attorney provides support in several key areas:

1) To articulate understandings with the seller

2) To assure conformance with Securities and Exchange Commission regulations for investors

3) To assure conformance in the sale process with various government regulations such as anti-trust law, regulations and taxes

4) To assure compliance by the prospective company with various regulations and laws

 

Consult an attorney to articulate and interpret understandings with the seller.

Your negotiations begin at the moment you make initial contact with either the seller or broker about a particular lead.  This contact may set the mood or atmosphere for negotiations throughout the process.  Therefore, you are wise to bring in an attorney very early in the game, preferably at the very start before you contact brokers to express interest about specific opportunities.

You also need an attorney to help with the various legal documents that put these understandings on paper.  For example, you are likely to be asked to sign a confidentiality agreement before you are even given the name of a prospective company for sale.  You should not sign any documents not even the confidentiality agreement, without an attorney’s review, in order to avoid unwanted understandings and legal repercussions further along into the process.  A good lawyer can help you to prevent future problems.  It is important not to make errors, legally speaking, that may complicate the process by accidentally setting up an understanding that complicates the contract from a legal point of view.  For example,  you can write in a letter that this is not a binding proposal, and is only an expression of interest, but still find out that in that letter there may still be agreements considered binding under the law.  For instance, if one of the parties walks out arbitrarily, he may be obligated, nevertheless, to compensate the other party.  Even though the letter say it is not binding, this paragraph remains binding unless it is spelled out in the proper manner.  In sum, if you don’t want expensive surprises down the line, you are wise to obtain legal services at the start.

 

Consult an attorney to assure conformance with Securities and Exchange Commission regulations for investors

You also need to consult with a good attorney before raising funds from private investors.  The U.S. Securities and Exchange Commission tightly regulates the manner in which potential investors can be solicited, depending upon a wide range of parameters that your attorney will be familiar with.  The number and type of investors is strictly regulated, depending upon the legal structure that you have chosen for your business.

 

Consult an attorney to assure compliance by the prospective company with various regulations and laws

Another very important aspect of your attorney’s work arises during due diligence.  He or she should be skilled in this type of activity, knowing what types of potential problems to look for and documents to review.

 

What to look for in legal help

Attorneys vary widely in their backgrounds and experience.  It is best to obtain an attorney, first and foremost, experienced with the purchase and sale of companies, who is familiar with such documents as the letter of interest, letter of intent, due diligence, closing documents, and so forth.  Secondly, if you can locate an attorney who specializes in a particular industry, such as for instance radio/communication deals or international deals, you will likely save money and get better service in the long run even if you have to pay a slightly higher hourly rate to do so.

Other Members of the Team

In addition to a good attorney, you are likely to need the assistance of at least one accountant to help you develop your business plan, and an auditor to review the seller’s books.  Sometimes this is the same individual but in a larger acquisition it may require two different people.  You may also need someone skilled in arranging financing, and depending upon your own business background, one or more consultants in sales and marketing, operations, engineering and manufacturing. If real property is involved, you are very likely to need the help of an environmental consultant.

These advisors may remain as consultants, or eventually become part of your management team.  If multiple partners are involved with the acquisition, then it is possible that some of them may play a role, either initially or long term, in these areas.  What is important is the access to competent advice in each area, early on in the acquisition process.

 

The accountant

 

In addition to an attorney, every deal also requires the assistance of a good accountant will be needed at different stages in the process:

1) To audit or evaluate financial statements and other documents to assess the financial condition of the prospective company;

2) To help develop pro forma statements for your business plan once you identify a prospect to purchase, including planning cost analysis.

 

The financial consultant

In addition to your accountant, you will find it helpful or necessary to obtain a consultant who specializes in advice in raising money.  At J.P. Industries, the initial team included both an accountant and a person skilled in finance. Investment bankers often offer this service, together with direct help in raising the capital required.  Investment bankers are becoming increasingly involved in this way, especially for larger deals.

 

Sales and marketing

Sales and marketing has always been important but in today’s market-driven economy it is essential to have someone familiar with this area to evaluate companies under consideration for acquisition.  You will want someone on your team who understands market strategy and dynamics as well as other marketing related issues such as distribution and pricing.          You also need someone expert in market strategy who can evaluate the health of the niche that your prospective companies serve.  You may have such experience, especially if you have a strong marketing and strategic background.  If not, you will need to seek out an experienced marketing manager or marketing consultant to advise you.

 

Operations, engineering, and manufacturing

Manufacturing firms also need team members capable of evaluating the engineering and manufacturing aspects of prospective deals. Several issues relate to the condition and quality of the facilities and equipment.  Are they in good repair? Are they up-to-date? Both software and hardware capabilities need to be assessed.  For instance, in engineering design, does the company have computer aided design capability?  Is the production process laid out efficiently?  Are engineering and manufacturing working together for new products? Is the company able to design and make its own production tooling or is this subcontracted out?  Who controls the know-how and the tools?  Are the tools designed well, technically speaking, in terms of longevity or maintenance requirements?  After a certain number of parts produced, who maintains them? If inventory is a significant part of the business, careful valuation of the inventory will need to take place before the price can be determined.  Do inventory items move quickly or are some items going to need to be written off?  Is there too much or too little inventory in vital areas?  Are modern inventory control and ordering techniques in use?  These and many other questions can be answered by the appropriate engineering consultant or team member with engineering and/or appropriate operations background. But it is vital that you identify someone capable of evaluating this area to assess whether it is technically current.

 

The environmental consultant

The environmental consultant is an essential consultant in any deal that involves real property. A preliminary inspection can often be done fairly inexpensively, to identify whether more extensive testing is needed.  The owner may be unaware of potential problems.  In the case of one company explored by JPE, Inc., an underground tank had been removed and covered the foundation of a new factory floor several years previously.  Unfortunately, the tank had leaked before it had been removed and had created a modest pollution problem, that nevertheless could be somewhat costly to clean up.  You need to locate a consultant that specifically specializes in testing for standards set by the appropriate governmental agency, such as the United States Environmental Protection Agency in the U.S.

 

Putting the team together

Even if people have their own area of expertise, they have to function together as a team.  Each of them looks at their own area of competence and integrates it in cross-functional discussions.  A good team is composed of competent individuals who understand the importance of working together with others.

Where to Find Prospective Team Members

This is one of the difficult challenges faced by all growing ventures, even after the launch of the start-up phase. Word of mouth recommendations from other business associates who have had success, contacts you have made in past work experiences and formal referrals from other consultants are some of the possible sources.  In a community, competent service providers will often know of other people that they have worked with in other deals and situations. One advantage of working with everyone on your team initially as a consultant is that the commitment is more short term in nature. This gives you the opportunity to observe that person’s competence and fit with the team before making a long term commitment.  You may sift through several deals before you close on a particular company.  Contract on a short term, deal by deal basis if you are not sure how adequately a particular consultant may service your needs until you get to know them, and whether they fit your expectations.

Summary

Building a good team is important right at the outset of your search.  You will need an attorney almost immediately, to review any confidentiality agreements or letters of interest that must be signed.  However, you should also begin to think about the other team members you will need early on in the search process.  A good accountant is essential to the adequate review of the seller’s books, and possibly in addition, an independent auditor.  Other consultants you need may depend upon your own skill levels and the nature of the business.  If you will need outside funding, a financial consultant may be needed.  Depending upon your own background in the functional business areas of sales and marketing, operations, engineering and manufacturing, you may or may not require outside help.  An environmental consultant is increasingly needed whenever real property is involved in the transaction, to assure that no hidden problems exist.

Be sure that you investigate any strangers thoroughly, to assure that they have the competence that you expect, and to avoid the chance of involving the unscrupulous.  Referrals from trusted acquaintances that have used someone in the past is ideal, but if you do not have such contacts, check out others as thoroughly as you can.  It is also important that team members work together smoothly, that they are able to communicate well and to treat each other with respect.

Reference: “How to Acquire the Right Business”

John Psarouthakis & Lorraine Uhlaner

Published by Xlibris, 2009

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