Acquiring another company can be a transformative move, propelling your business to new heights. However, the process is complex and requires meticulous preparation and execution to ensure a successful transition. Below is a comprehensive pre-close checklist that will guide you through the necessary steps to prepare for closing on an acquisition, ensuring a smooth integration of employees, culture, and systems.
1. Thorough Due Diligence
Before closing, conduct thorough due diligence to understand the target company’s financial health, operational efficiency, legal standing, and market position. Review key documents such as financial statements, tax returns, contracts, and employee records. This step is crucial in identifying potential risks and ensuring that the acquisition aligns with your strategic goals.
From a financial perspective, your goal is to identify anything out of the ordinary by thoroughly reviewing taxes, business profit and loss statements, and monthly bank statements. The cash inflows shown on the bank statements, particularly from collections, should roughly align with the revenue reported on the P&L. When you normalize accounts receivable—considering how long it takes for payments to come in—the numbers should generally match. For example, if a business reports a million dollars in revenue but only half a million in bank deposits, that’s a clear red flag, unless the balance matches up with A/R and collections reports.
Next, conduct a thorough review of the assets you’re purchasing. Is the equipment in good working order? Do the values presented by the seller align with fair market value? Is there excess inventory, and is it turning over quickly? In one of our deals, we found that the majority of the inventory was unsellable because it was over a year old, leading to a necessary adjustment in the purchase price. Always be vigilant for stale, non-sellable, or obsolete inventory, as these can be excluded from the purchase price. Also be sure that all of the assets that you are purchasing are relevant to today’s operations of the business. You don’t need to be spending valuable cash on obsolete assets or inventory.
2. Legal and Regulatory Compliance
Ensure that all legal and regulatory requirements are met before the acquisition. This includes obtaining necessary approvals, understanding antitrust laws, and ensuring that the acquisition complies with industry-specific regulations. Engage with legal experts to navigate these complexities and avoid potential legal pitfalls.
Consider any potential unseen liabilities when evaluating a business. For example, if you’re looking to purchase a construction company, examine how they store their equipment and chemicals, review their OSHA logs, and check for any past pending lawsuits or litigation. Conduct a thorough review of the company using tax, government (state and/or federal) records, and ad hoc review.
- Financial Planning and Alignment
Secure the necessary financing and ensure that your financial projections are aligned with the acquisition strategy. Establish a clear understanding of the target company’s debt, liabilities, and cash flow. Create a detailed financial plan that includes cost synergies, potential revenue growth, and integration costs.
The lender will be a crucial ally in your financial due diligence, as they will underwrite the deal and assist with various aspects of the process. For instance, they will arrange for an appraisal of the business and flag any potential red flags as part of their risk management. During this stage, it’s important to develop forward-looking projections that account for all additional expenses you will incur as the new owner. If the business previously lacked marketing efforts, include that as a line item. If additional investments are needed in technology or staffing, incorporate those into your projections as well. Consider creating both a conservative and aggressive model; aim to achieve the aggressive growth targets, but ensure that your conservative projections are a reliable baseline that you can hit “without fail” and that all potential and planned cash expenditures or investments are accounted for in your projections.
4. Cultural Integration Strategy
The successful integration of company cultures is a critical factor in post-acquisition success. Conduct cultural assessments of both your company and the target company to identify potential cultural clashes. Develop a cultural integration strategy that promotes alignment in values, communication styles, and work ethics. Engage employees early in the process to foster a sense of unity and shared purpose.
If you identify individuals who don’t align with the company’s culture, develop a mitigation plan. While this isn’t necessarily a reason to forgo the purchase, it may warrant immediate action after the acquisition, such as choosing not to rehire those individuals. In an asset purchase, all employees are technically terminated by the old organization and rehired by the new one. Use this transition as an opportunity to assess whether all current employees are necessary and aligned with the cultural values you want to uphold. There’s no point in bringing onboard a bad apple if you’ve identified one and they are not absolutely crucial to the transition of clients or revenue.
5. Employee Transition Plan
Employees are the backbone of any company, and their seamless transition is key to the acquisition’s success. Develop a comprehensive employee transition plan that includes communication strategies, retention incentives, and onboarding programs. Address potential concerns about job security and career growth to minimize disruptions and maintain morale.
Similar to the cultural aspect, consider what will be required to nurture the human capital relationships within the organization. As the new owner, it’s important to invest time, energy, and effort into ensuring that the team you inherit truly becomes your team. Some owners choose to offer raises to retain key employees, but it’s essential to conduct a thorough review of the employee benefits package as well, to ensure that they are competitive in the market. For optimal transition, it’s important to communicate effectively to your new employees and what upside they can potentially see in this transition. By virtue of the acquisition, there could be advancement possibilities for some key people that did not exist before, and letting the entire team know how this deal is great for them is important to communicate.
6. System Integration
Integrating systems such as project management, resource planning, accounting, and HR is crucial for operational continuity. Identify the key systems used by both companies and develop a plan for merging or aligning them. Consider the compatibility of software, the need for data migration, and the training requirements for employees. The goal is to create a unified system that enhances efficiency and reduces operational risks.
For a smooth systems integration during an asset purchase, it’s crucial to set up everything from scratch in your new entity. Ensure that all your QuickBooks accounts, P&L statement classes, and GL codes are properly configured for the new business. Pay particular attention to these setup details, including the different categories on the P&L statement and corresponding GL codes. There may be some shifts necessary from their existing GL setup to work with your existing setup.
Equally critical is ensuring that payroll is fully set up and functioning correctly. Avoid any disruptions in employee payments by preparing early on this point. Starting a new payroll system shouldn’t result in delays or missed paychecks, as this can lead to losing valuable staff. Make sure that all personnel and financial systems are operational from day one. While consolidating and eliminating duplicate systems can be addressed later, your immediate focus should be on maintaining seamless operations from the start, and nothing can be more damaging to a transition than employees not getting paid according to their typical schedule.
7. Communication Strategy
Clear and transparent communication is vital throughout the acquisition process. Develop a communication plan that addresses internal and external stakeholders, including employees, customers, suppliers, and investors. Regular updates on the acquisition’s progress, benefits, and impact will help build trust and ensure a smooth transition.
Your communication strategy should leverage this opportunity to convey the positive aspects of your acquisition to everyone involved. Clearly articulate why this transition is beneficial to all stakeholders (including your team) and outline your high-level plans for the future. This message should be tailored to clients, vendors, partners, and lenders, ensuring they understand the exciting developments and how these changes will positively impact them.
8. Change Management
Acquisitions often involve significant changes, and effective change management is essential to navigate these transitions. Implement a change management framework that includes leadership alignment, employee engagement, and continuous feedback mechanisms. Equip your leaders with the tools to manage change and guide their teams through the integration process.
Consider holding regular town hall meetings to give everyone a chance to voice their thoughts on the transition, especially if the integration is complex. It may also be beneficial to appoint a dedicated point of contact for employees to receive status updates—whether that’s yourself, someone in a human resources function, or someone else. Establish a regular cadence for communication and a feedback loop to address any issues that arise during the integration process, as some friction is likely to occur, but can be minimized with an effective change management strategy.
9. Retention of Key Talent
Retaining key talent from the acquired company is critical to preserving its value. Identify key employees and offer retention packages that include financial incentives, career development opportunities, and clear paths for advancement. Retaining institutional knowledge and expertise will be instrumental in ensuring a smooth transition and achieving post-acquisition goals.
Just as with employee retention, it’s crucial for you as the new owner to invest time, energy, and effort into integrating the inherited team into your organization. Have regular meetings with your team leads (bi-weekly or monthly works best) and help them problem solve and keep up a sense of urgency in all that they do. Address any problem solving opportunities quickly, and do not let things simmer, as action is important to retaining key talent.
10. Post-Close Integration Plan
Develop a detailed post-close integration plan that outlines the steps for the first 100 days after the acquisition. This plan should include timelines, responsibilities, and milestones for integrating employees, systems, and processes. Regularly review progress and adjust the plan as needed to address emerging challenges.
“Fail to plan, plan to fail.” This adage is particularly relevant in the context of acquisitions. Entering an acquisition without a well-thought-out plan is a recipe for disaster. To ensure success, develop a comprehensive plan that outlines your strategic objectives, operational goals, and integration strategies. Identify key performance indicators (KPIs) that will help you gauge whether the plan is on track. These indicators might include financial metrics, operational efficiencies, and employee retention rates. Additionally, establish clear milestones to measure progress throughout the integration process. Regularly review these milestones to assess performance and make necessary adjustments. By proactively planning for and monitoring your acquisition afterwards, you can navigate challenges more effectively and steer the process towards a successful outcome.
Conclusion
Closing on an acquisition is just the beginning of a complex process that requires careful planning and execution. By following this pre-close checklist, you can ensure that your company is well-prepared to absorb the new business, integrate its employees and culture, and align systems for long-term success. With the right strategies in place, your acquisition can unlock new opportunities and drive significant growth for your business.
These strategies are crucial for mitigating risks and ensuring a successful acquisition. Securing a good deal involves more than just evaluating the financials and the purchase multiple; it encompasses the entire process of integrating the company effectively and establishing your leadership. This approach provides a solid playbook for managing the integration and making a positive impact from the start. Ultimately, a good deal is defined not just by a low purchase multiple and strong cash flow but by how well you manage and reduce risks in the integration of the acquired companies. These strategies, when implemented and planned accordingly, are designed to help you achieve that.