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The 10 Steps of the Business Acquisition Process

Apr 21, 2023 • 10 min read
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      The term ‘mergers and acquisitions’ refers to the combination of two or more companies into a single business entity. This joining-together of multiple companies can take place when two or more businesses form a new legal business entity (aka a merger) or when one company purchases another and absorbs its resources into an existing business entity (aka an acquisition). Acquisitions are the far more common of the two M&A options. 

      Whether you’re forming a new entity or preparing to combine an existing business with your own, the M&A process can be complex. But if you execute mergers and acquisitions properly, they could represent a chance to accelerate your company’s growth and add value to your business at a much faster rate than you might be able to accomplish on your own. 

      Below is an overview of 10 basic steps in the merger and acquisition process that could set you up for success. You can use the broad details below as an inspiration to conduct deeper research.

      1. Acquisition strategy

      Before you begin the M&A process, it’s important to define the goals you’re trying to achieve. Write out details about what the ideal business acquisition looks like for your company. For example, how much capital is your company is willing (and able) to invest to acquire another business? What benefits and assets does your business expect to gain in return for purchasing another company?  
      Perhaps your business wants to expand its product line or broaden its access to new markets in an effort to boost its profits. Or maybe your company desires to eliminate the competition it’s facing in a particular area. Whatever your acquisition motivations may be, take the time to define them on paper so you’ll know what you’re looking for in advance.

      2. Evaluating potential targets.

      Next, it’s time to outline the criteria you would like potential acquisition targets to meet. As you make a profile of potential companies you might want to consider for acquisition, here are some key details to consider. 

      • Customer base
      • Geographic location
      • Profit margins
      • Company size
      • Products and services offered
      • Company culture

      Once you have a list of companies that meet your criteria, you can perform an initial evaluation of those businesses. From there, you (or a representative on your behalf) can reach out to your top choices to gauge potential interest. 

      You’ll also need to decide whether you’re open to the possibility of hostile acquisitions. A hostile acquisition involves making an offer to the company’s shareholders without the knowledge of the company’s board of directors (also known as a tender offer). Hostile acquisitions can be more difficult to navigate in the post-closing phase of the M&A process. So, it’s an important detail to consider.

      3. Letter of intent.

      If one of your target companies expresses sincere interest in a purchase, the next step in the M&A process is typically to send over a letter of intent (LOI). This document expresses your official interest in moving forward with a merger or acquisition and may provide a summary of your initial proposed offer. 

      At this stage most acquiring businesses will also request additional financial details from the target companies with which they’re negotiating, as well. And it’s standard for both parties to sign a confidentiality agreement that agrees not to disclose details of the M&A offer nor the company’s financial information with the public. 

      4. Valuation

      Once the business you’re interested in acquiring provides its current financial details, you’ll be in a better position to assess the value of the target company. In addition to financial data, you should also consider any external factors that might impact the success of the deal and whether the target company would be a good fit with your existing company culture.

      Valuation of a merger or acquisition can be complex. Nonetheless, it’s one of the most important steps in the M&A process. For that reason, many companies seek expert assistance and may hire outside consultants to perform or assist with the valuation process. 

      5. Making an offer.

      After completing the valuation process, you may be ready to make an initial offer to the shareholders of your target company. The offer you present might propose a cash purchase, stock ownership, or some combination of the two. 

      The selling party will take some time to review your M&A offer and may present a counter offer of its own. Negotiations could go back and forth for some time until both parties agree on terms that everyone can accept or the deal falls apart.

      6. Due diligence

      Assuming negotiations are successful and the selling party accepts your purchase offer, the next step in the M&A process is due diligence. Due diligence is a review period that often lasts 30 to 60 days (sometimes longer). You can (and should) use this review period to confirm that every aspect of the deal is in order before you move into the final steps of purchasing another business. 

      As you perform due diligence of a target company, you’ll want to review details such as:

      It’s important to leave no stone unturned during the due diligence process. Your goal should be to verify that there are no inconsistencies in the information the seller provided you earlier in the M&A process—the information on which you based your offer. 

      If you discover any conflicting details—such as financial statements that don’t match up with the information you were given, for example—it might be cause for an adjustment in your offer. In extreme cases, problems that arise during the due diligence phase might result in a decision to walk away from the transaction altogether.

      7. Purchase agreement

      Once the due diligence process is complete (and assuming there are no issues), you can begin to draft a purchase agreement. The purchase agreement should detail the cash and/or stock that shareholders of the target company will receive once the sale is complete. The document should also outline when said assets would transfer to the target shareholders. 

      It’s important to confirm that your agreement complies with all federal and state regulations and doesn’t violate any antitrust laws. Some M&A transactions may require approval from the state and/or federal government before you can finalize your purchase agreement. So, you may want to consult with an attorney with experience in M&A transactions for guidance. 

      8. Closing the deal.

      Assuming you receive government approval of your purchase agreement (if it’s necessary), you should be ready to close your M&A transaction. All of the parties involved will need to sign the purchase and sale documents for the deal to be considered closed. At this point, ownership of the target company should officially transfer to the acquiring company.

      9. Financing strategy

      As an interested M&A buyer, you should begin researching business acquisition loan options long before the ink dries on a purchase agreement with a company you want to buy. However, you will likely finalize the details of your business financing terms after you sign those purchase and sale documents. 

      10. Post-closing

      After a business acquisition closes, the management teams of the target company (aka the seller) and the acquiring company (aka the buyer) will cooperate together during the transition process. The teams will work to combine the two companies into one—merging finances, organizational structures, company culture, and more. This integration process can take months or even years to facilitate, and you should closely monitor for any potential hiccups along the way. 

      Are you ready for your first business acquisition?

      Business owners are motivated to consider mergers and acquisitions for a variety of reasons. Whether you’re interested in buying out a business partner, acquiring new technology, removing a competitor from the marketplace, or finding a unique way to expand your company’s geographical footprint, the right M&A deal could present plenty of potential benefits. 

      At the same time, it’s important to approach the M&A process with eyes wide open to the possible downsides as well. Acquisitions and mergers can be time-consuming and often take months and sometimes years to complete. Not only can the M&A process be tedious and time-consuming, it involves a significant amount of risk as well. More than two-thirds of mergers and acquisitions fall short of producing their desired results according to PwC

      Nonetheless, the right M&A deals could represent an opportunity to grow and expand your business at a faster rate. Consider the triumphs of famous acquisitions like Google and Android, Disney and Marvel, and Exxon and Mobil as examples. Analysts also point out that although M&A activity tends to decrease during seasons of market volatility, those times can often bring forth attractive value propositions for deal makers who are willing to take a risk. 

      So, if you think you’re ready for your first business acquisition, be sure to do your homework. Take the time to learn from the examples of other mergers and acquisitions and review the guide above to help improve your odds of success. 

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      About the author
      Michelle Lambright Black

      Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. Founder of—an online community that helps busy moms take control of their credit and finances—Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many more.

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