Post written by: Ted Lauer, SVP with Access National Bank, a division of: Union Bank & Trust
Join us at our upcoming Loudoun GovCon Event, “Government Contracting M&A: The State of Market and Acquisition Strategies” on Wednesday, June 5, 2019. Register Here
Growth in the government contracting space can be achieved in more ways than just business development success fueling organic growth.
When already successfully growing organically the question comes up, how do we grow faster? M&A can propel that growth, but is not a replacement for achieving organic growth. If your platform business is not executing at a high level, well-staffed and with good corporate governance, the hill to climb for successful acquisition-integration becomes more a mountain.
So, let’s assume your existing platform business is up to the challenge, with at least CPA Reviewed financial statements further evidencing such, how would you approach using M&A to layer more growth on top of that? Many investment bankers will engage in strategic discussions with growing business at no cost or obligation in the interest of building a relationship to be well positioned for an opportunity to sell your business down the road. Build such a relationship and you can gain valuable insights about thoughtfully and strategically growing your business.
These investment bankers then become a source for showing you companies (“targets”) your business might acquire. When you find a target, you will be offered access to substantial information about the target, subject to executing a Non-Disclosure Agreement, which will allow you to evaluate whether the target is a good fit for your company. If you determine that the fit is strong, you will be invited to submit a proposal, typically in the form of a Letter of Intent (LOI), detailing the terms of the proposed purchase.
As a critical part of the LOI, you will need to detail the financing structure you plan to use to consummate the deal. Senior bank debt often plays a foundational role, perhaps supplemented with more expensive junior (“mezzanine”) debt costing in the low-teens %, or alternatively a single “uni-tranche” loan.
Seller-financing often supplements the prior mentioned sources, and an “earn-out”, and/or “equity roll” may be the final outside sources to fund the transaction. If your LOI is successful, you will begin final due diligence of the target’s financial, legal and other business matters, and legal documentation of the transaction reflecting the terms of the LOI.
Once you have closed the purchase, and if you acquired the right business, paid a fair price, it all remains at risk if the integration is not well managed. Third party advisors can play an essential role in successful integrations, and should be relied upon heavily for the first acquisition where you are learning the ropes.