One of the principal errors that many M&A practitioners make before making an acquisition is not putting together a business plan. The business plan is an invaluable asset when planning M&A. It creates a roadmap for what you’re looking for from a business acquisition, as well as providing reassurance to those funding the deal that the rationale behind it is solid and that the decision to acquire is not being made on a whim.
The format of the business plan for an acquisition has a similar structure to that of a business plan for a startup and includes many of the same sections. When writing either of these documents, you should be asking yourself ‘does what I’m writing sell the opportunity?’ If the answer to that question is ‘no,’ you need a rethink, maybe not just for the document, but perhaps for the acquisition itself.
Having said all that, here’s a typical outline of how a business plan for an acquisition should look:
1. Executive Summary
Even though it comes at the beginning, most how-to guides on business plans suggest leaving the executive summary until you’ve written everything else. While this is pretty sound advice, a good rule of thumb is that, if what you’re proposing is compelling enough, you should have a rough draft of the executive summary in mind before even beginning.
A good executive summary should cover a page and sell the opportunity as best as possible, covering its target market, your strategy and summary financials. This is often the only page that investors read before skipping to the financial projections, so make sure it’s strong.
2. Target Description
This section outlines the business you’re acquiring and why it’s worth what you’re proposing to pay for it. Be as thorough as possible here. If there are weaknesses that you see in the business, introduce them and talk about how you can iron them out and generate value. At a minimum, include details such as
- headline financials
- a breakdown of the company’s long-term assets (factory, head office, facilities, stores, etc.) and liabilities
- a SWOT analysis
- corporate structure.
If the company operates in a different segment to your own, show how you can make this work in your favor.
3. Market Overview
A common error when looking at the market overview is to think globally. Startup investor Peter Thiel refers to this, whimsically noting that someone owning a restaurant could say that they’re entering a trillion dollar industry, when in reality, their market is a five mile radius around the location of the restaurant. The more granular the detail here, the better.
- How many customers does the target have, and what kind of customers are they?
- Will you lose their business if the current owner moves on?
- What kind of demand is there for the business outside of its current customer base?
4. Sales and Marketing
This section provides an overview of the sales for each of the target’s products and services. It should show their pricing strategy and how it compares to your own, and how the company currently conducts its marketing.
For example, if it uses mailing lists to contact customers, is that something you could leverage for your own products and services? Or perhaps you feel it’s not investing enough in marketing and that you could increase sales by investing in this area. In either case, outline the ‘quick wins’ that you can exploit here after acquiring the business.
5. Financial History and Projections
When looking for financing for an acquisition, this section is the one which will make or break the deal. Thus, you should be as thorough as possible here, analyzing the target’s past financial performance. At a minimum, this should involve three years of financial statements and tax returns but five or more is even better. The analysis should be comprehensive and honest. It should raise issues which may conflict with your own business - for example, different credit arrangements with customers or a significant difference in capital structure.
Once this has been completed, you can look at projections for the business. These projections should tie in everything you’ve written until now; if you plan to increase sales and marketing, this should show in the income statement; if you’re going to use income from the acquired business to pay down debt, this also needs to be accounted for. There is no right answer for how much your growth projections should be, but it should be justified by the vision that you’ve laid out until now.
An interesting, if potentially complex, sub-section to add to the financial analysis are the gains from synergies and losses from cannibalism that you see emerging from the deal. Synergies might come from cutting some admin or sales staff or merging sales channels (for example, online or direct mail) after the acquisition.
Cannibalism arises when you’ve got one of your sales reps selling the new, wider product range, and the customer ends up choosing the target’s product over your own. It’s easy to fall into the proverbial rabbit hole with this section, but it’s still a useful exercise to make you think about where gains (and losses) will be made from the acquisition.
6. Transition Plan
This is typically a brief section which shows how the business will move from the control of the current owners to your own. This is not purely about ownership, however. It should also detail how current sales relationships, contracts and intellectual property are dealt with in the transition.
You can minimize the disruptive influence of the acquisition by getting this section right. If there are complex processes at the target company, know who performs them and how this will be dealt with. Thousands of acquisitions are botched every year by undervaluing seemingly small processes which generate value right across the business.
7. Deal Structure
The topic of deal structure has been covered well elsewhere [link], and these articles can be of assistance when adding this section. Having put together a failsafe case for acquiring the target company, now you show the financial structure you will use to do so.
8. Appendices/Supporting Documents
A major difference between writing a business plan for a startup and one for a business acquisition is the variety of supporting documents attached. At a minimum, this should include copies of tax returns and licenses, but could go into greater depth and show contracts with large customers, auditors’ letters and any other legal documents deemed relevant.
While there is room for some variation in sections of each business plan, one thing every plan should have in common is its ability to convince the reader of the merits of the acquisition. Each section should be detailed and compelling.
If you’re not willing to put in the groundwork on a business plan, an investor is entitled to ask, ‘why should I give a million dollars to someone who can’t write 20 pages?’ By spending time on the business plan, and taking a critical perspective, you maximize the chances of your acquisition finding a funder, and simultaneously creating a strategy for the acquisition that primes it for success.