Buy-Side Considerations for First-Time Acquirers

Four pillars for getting your growth through acquisition off the ground.

Knowing you’re ready to buy is one thing, knowing how to go about it is another. 

We recently interviewed John Carvalho, president of Stone Oak Capital Inc. and the educational resource Divestopedia, who outlined four foundational acquisition pillars he advises his clients to follow: deal sourcing, offers, overcoming challenges, and integrations. By breaking down the process into these four distinct phases, you’ll be able to anticipate the needs at each stage of the deal and create an effective game plan. 

1. Deal Sourcing 

Deal sourcing is a crucial step for anyone considering acquiring a business; however, “there’s a misunderstanding around how many deals you have to look at to land on one,” Carvalho says. A company will likely look at several hundred opportunities before refining its list down to six or seven. Additionally, it’s important to understand the normalcy of high failure rates, so you aren’t surprised if the deal falls through. 

Other considerations: 

  • To maximize your reach, opt for a combination of online deal sourcing platforms and traditional, network-driven deal sourcing. 
  • Establish goals based on your company’s needs and objectives. 
  • Narrow down your list of objectives by having a realistic sense of the associated risks and rewards. 
  • Keeping variables in mind such as corporate culture, location and size can assist in further refining your criteria and focus. 

2. Offers 

Considerations to keep in mind when making an offer:  

  • Your offer should be in the ballpark of the amount cited by the seller — starting too high or too low can negatively impact the process. Room to negotiate is beneficial; however, you don’t want to delay the process, kill it altogether or impact a future deal.    
  • The offer should be made through a letter of intent (LOI). This written non-binding document serves as an initial offer that outlines the basic structure of the potential transaction, the scope of the due diligence, a summary of terms and any other important details.  

3. Overcoming Challenges

Overcoming the myriad of obstacles that emerge within the due diligence process can be tricky. How do you know when to walk away or mitigate the risk? By approaching each deal with a set of deal breakers and an understanding of the potential challenges, you can feel more confident when the time comes to ask yourself these questions. 

Knowing your deal breakers before it’s too late will make it easier to decide when it’s time to pull the plug. Potential deal breakers could be associated with: 

  • Valuations and price
  • Legal issues
  • Tax issues
  • Ethical issues
  • Lack of preparation by the seller
  • Extended delays throughout the process

Often business owners “don’t know how to mitigate the risk, either operationally, through due diligence, or within the terms and agreements that they are signing,” Carvalho voices. So, when unsure whether or not a risk is a deal breaker, try identifying the probability of the risk occurring, its worst-case scenario and how you’d be able to mitigate it. Many a time the risk can appear scarier than it actually is, so properly analyzing each risk can help to evaluate the deal objectively. 

4. Integrations 

From employee culture to branding, post-merger integration requires detailed analysis and proper planning, “at the onset, establishing that strategy for the type of acquirer you’re going to be, gives you a roadmap for how integration will follow through,” Carvalho mentions. 

Bringing two organizations together, each with its unique structure and processes is a challenge. A lack of planning can lead to a failed deal or the inability to extract true value — something that happens more often than not. With this in mind, integration planning should: 

  • Start as soon as the deal is announced 
  • Establish a set of success factors 
  • Align the cultures of each company to combine capabilities

Illustration by Christy Lundy


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