The description of the process of acquisition consists of the following points:

Defining the Investment Criteria

Some acquisition processes start with the discovery of an investment opportunity in the market with an excellent strategic fit for the company. In other cases, acquisition-driven growth springs from a strong desire to develop an expansion plan that includes a proactive search for acquisition opportunities.

In the latter case, the process must start with defining the company's investment criteria in terms of investment capacity, capacity for taking on debt, the size of the desired investment, the sector, the size of the company to be bought, productivity and profitability criteria, degree of strategic fit, kind of transaction, etc.

Despite the fact that some aspects, such as the capacity for taking on debt, will be conditioned by the characteristics of each of the opportunities finally presented, an in-depth review of all of these enables one to search for candidates efficiently and avoid improvisation during the later stages of the process. On some occasions, when the deal is a local one, the company may straight away draw up a list of the competitors that they may be interested inbuying.Obviously, the acquisition process will substantially differ depending on whether it is a specific opportunity available in the market, a predefined list of companies considered of interest for acquisition or a purchase profile to be used to identify companies that fit the criteria.

Pinpointing Opportunities for Investment and Contact

Market research must be carried out based on the investment criteria set in order to identify those companies that fit the purchase profile. Closa M&A's international offices in the countries in which acquisitions are sought carry out the same kind of research. The result of this is a list of companies of interest, including certain preliminary information about each of them, making it possible for the company and its advisors to decide on the contact strategy and which companies are to be contacted due to fitting the purchase profile better than others.

The contact strategy must be decided on with particular care as, occasionally, especially in the case of directly competing companies, direct contact could cause a negative response, even when there may be potential interest in selling the business. Thus, in particularly sensitive cases such as these, an approach strategy must be established to make it possible to find out the other party's initial interest without revealing the investor's identity. On other occasions, a clear, direct declaration of interest by the company gives the potential seller unrealistic price expectations.

Research and Drawing up the Prospectus

The advisor makes contact with the companies that show an interest in selling after the initial contact. The aim is to establish a frank communication that makes it possible to find out whether they are really interested in the process and then, reveal the buyer's identity.

Buying a company requires great involvement by the seller so that the buyer can find out about the company to be bought in depth. It is advisable to insist upon the seller appointing specialist advisors to represent it in the process as its complexity requires the involvement of professionals who have experience in mergers and acquisitions.

It is also advisable to set a timetable and explain the various stages in the process to the seller.

In order to access the information required to analyze the company, the parties normally sign a non-disclosure agreement by means of which the seller obtains written guarantees about the good use that the buyer will make of the information it will be provided with. Even if the seller does not ask the investor to do this, due to lack of experience in these kinds of processes, it is advisable for the buyer's advisors to offer one. This creates an atmosphere of transparency and trust that is essential in processes of this kind.

It is important for the investor and its team of advisors to spend time deciding on the operational and financial information required to analyze the business. Through various work meetings, the advisor must subsequently compile and organize all the available information and draw up a Prospectus that makes it possible for the investor to decide on the kind of transaction desired as well as the basic terms of its bid. The Prospectus must be of the right length and level of detail for the requirements of the investor's board of directors.

In addition to the information contained in the Prospectus, it is sometimes advisable to carry out a valuation range study. However, when making the initial bid, one must take into account the aims and private expectations of each of the shareholders in the company acquired as well as those strategic aspects that led to the purchaser's interest that are not covered by a purely financial analysis.

Negotiating Process

This stage generally starts with initial direct contact between the parties by means of a Letter of Interest from the buyer that kicks off a round of negotiations. During this stage, the seller must provide all the extra information that the buyer may need in order to negotiate. Depending on the nature of this additional information and how confidential it is, it may be provided through Data Room sessions or in the same way as the previous information. It is important for the buyer to be closely involved in this stage, even when the negotiations are being handled by its team of advisors.

The other party must be clearly informed of the aims sought through the acquisition so that it understands the kind of transaction that the buyer is interested in. For example, buyers that want to increase their ability to generate profits will not be interested in buying assets, while buyers interested in increasing their market share will be interested in buying assets such as trademarks.

There are various ways of bringing the parties closer regarding the price. One of the most usual is granting irrevocable put and call options over some of the shares, which must be exercised within a set period of time and at a price calculated as set out in the purchase agreement. Another option is to set up earn-out formulas through which the final price of a set of shares sold when signing the purchase agreement is calculated on the basis of a change in a certain parameter of the profit and loss account (which is usually EBIT or EBITDA). These two ways of getting the best sale price for the seller without overvaluing the company for the buyer are based on the seller's confidence about the company's future and on it staying independent after the purchase takes place. In addition, deferral of part of the payments using earn-out formulas or options makes it more convenient for the buyer to finance the acquisition.

The result of the negotiation tends to be set out in a Letter of Intent, which although it is generally not a binding document, establishes the basic terms of the transaction and is the raw material used by both parties' legal teams to draw up and agree on the contents of the final purchase agreements.

Due Diligence Process and Closing the Transaction

About one in three transactions in which the parties sign a Letter of Intent end up not being completed. Why? Both buyers and sellers often mistakenly believe that once the Letter of Intent has been signed they no longer need to be involved, when in fact the Due Diligence stage and the drafting of the legal documents is when both parties must be more vigilant about the aspects that the transaction entails. Professionals from other disciplines are involved in this stage of the process. They are unaware of the background to the negotiations and therefore may easily misinterpret the agreements reached, not understand the nature of the negotiations and thus cause misunderstandings that could even lead to the transaction being called off. So it is worthwhile for the seller and its advisors to stay in charge of the process and monitor the work carried out by their auditors and legal counsel.

The buyer must carry out a painstaking Due Diligence process to check the information provided and ensure there are no greater contingencies or lawsuits underway than previously known. The Due Diligence process will probably result in some aspects of the transaction being renegotiated. So it is important to also keep communication flowing between the parties so that all issues that could raise in this final stage are dealt with as soon as possible.

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