How To Buy A Business In Singapore: The Essential M&A Guide
Taking over a business for sale consists of 8 broad steps:
- Strategic Purpose of Acquisition
- Target Search
- Getting to know your target
- Offer and Negotiation
- Due Diligence
- Purchase Agreement
- Takeover and Integration
Strategic Purpose of Acquisition
The process begins with the buyer identifying the specific motivations for purchasing another firm. What are the benefits they are looking to get out of it?
Some of the most common reasons are:
- Rapidly scale a business
- Expand into new/overseas markets
- Improve unit economics by combining business functions
- Acquire new technology that would be difficult to self-develop
Formulating an overall strategy for how an acquisition helps your business will influence the types of companies you need to look at, and how much you will need to pay for the takeover.
After the acquisition purpose has been confirmed, the buyer creates a list of potential companies to buy (the “targets”) based on the strategic criteria they have identified.
For instance, a buyer looking for rapid scale may focus their search on targets that have a large customer base and high growth rates. A buyer looking for exclusive technology will look for firms that have developed innovative software/hardware whose rights they can acquire.
Often, bigger buyers will hire an investment bank to help in the M&A process. These banks have a dedicated M&A department that will handle the entire process from start to finish for their clients. In exchange, investment banks typically ask for a portion of the final acquisition price (2-8% is typical), and a retainer fee ($50,000 to $100,000 a year).
Small to mid-sized buyers will sometimes hire business brokers, which perform similar M&A functions to investment banks. These brokers charge lower fees, and specialise in executing smaller deals that would be too costly for a buyer to give to an investment bank.
Getting to know your target
If the buyer and target show a mutual interest in the transaction, they will both prepare a Letter of Intent or a Term Sheet. This is a legal document that sets out the material conditions of the takeover, signifying both parties want to move deeper into the process.
A Non-Disclosure Agreement (NDA) will also be signed to prevent sensitive transaction details from being leaked to competitors and other parties.
After these documents have been prepared, both parties will exchange corporate information like financial statements and business plans. This information will be assessed by the management and Board of Directors of both firms to get a better sense of the deal’s benefits, and potential risks.
Once the buyer has received the target’s financials and business plans, they will construct an M&A financial model to determine a purchase price.
This model can comprise several common valuation techniques:
On top of the standard purchase price, the buyer will often pay a takeover premium between 10-25%, depending on the strength of synergies provided by the target. Target firms that provide particularly strong synergies can even command premiums upwards of 50%.
Synergies are a crucial factor in determining the eventual price a buyer will pay, and the ultimate strategic benefit to the buyer.
Common synergies are:
- Lower costs from combining business units (Marketing, R&D, Sales, etc.)
- Faster growth from access to new markets, patents, or technology
- Stronger pricing power from increased market share
From a valuation standpoint, there are two outcomes: the deal is either earnings accretive or earnings dilutive.
An accretive deal means that net profit per share for the combined entity increases after the takeover, and a dilutive deal means that net profit per share decreases.
An accretive transaction is immediately beneficial to shareholders, since each share is now worth more than before. However, it is not necessarily true that accretive deals are always better than dilutive ones. A dilutive deal may temporarily reduce shareholder value, but if there are strong long-run synergies, then such a transaction can actually be accretive down the road, bringing great benefits to shareholders.
Offer and Negotiation
Once the buyer has completed their valuation, they will send their purchase offer to the target’s shareholders. Purchase offers can be made in cash, or stock, or a mix of both.
If there are multiple buyers competing to buy the same target, this is the stage where they will enter a bidding war to offer the best price and terms.
Negotiations will involve more than just purchase price. For example, a highly contested point will be the target’s Representation and Warranties. This is a legal obligation by the target to provide compensation to the buyer if the information they have provided is inaccurate. Buyers will want comprehensive warranties and large indemnification amounts, while targets will want the minimum possible to close the sale.
At this stage, the buyer will conduct thorough checks on the target. This is to ensure that information provided by the target is accurate, and no material facts that could adversely affect the buyer have been concealed. Buyers will construct a due diligence checklist to ensure a thorough investigative process.
Some common items in a due diligence checklist are:
- Independent audit of past 5 years’ (or longer) and projected financial statements
- Review of all insurance policies
- Review of compliance with government regulations
- Review of potential legal liabilities
- Review of physical assets and their operating condition
- Technological audit of software or products (if applicable)
- Interviews with target’s customers, suppliers, and employees
It is crucial for the buyer to allocate sufficient time and resources for a comprehensive due diligence process. Ensuring that all the facts are in order will save the buyer from serious repercussions later on, like having to initiate legal action against the target for misrepresenting information.
After due diligence is complete, any discrepancies must be highlighted and mutually resolved. Material discrepancies will often result in purchase terms being altered. For instance, if some undisclosed legal liabilities are discovered, the purchase price will likely be lowered, and the buyer will demand greater indemnification from the target to protect themselves.
Regulatory approval may have to be sought if the target is operating in a heavily regulated industry (e.g. financial services), or if the deal has a risk of severely restricting market competition.
Once all negotiations have been finalised, both parties will then sign the Purchase Agreement.
Takeover and Integration
After the purchase agreement is signed, the buyer makes payment and legally assumes control of the target. Buyers in Singapore must notify the Accounting and Corporate Regulatory Authority (ACRA) within 14 days of the sale closing.
It is important to note that closing the deal is only the beginning of another long but critical process: the successful integration of buyer and seller.
Here are 5 key steps to ensure a smooth transition as both companies merge:
Establish clear targets: Leaders should set out what financial and non-financial results they want to achieve, and when they want to achieve it by. Focus on the key decisions needed to create an integrated company – any fine-tuning can come later. For instance, prioritise issues like creating a unified product/service mix with a clear marketing strategy; tweaking product features can be done after the integration is done.
Coordinate closely: Key integration decisions will require input from multiple business functions, and this input should be given quickly. With reference to the earlier example, a marketing plan for a combined product portfolio can only be created after the new portfolio has been decided upon.
Leaders must thus create an overall workflow for integration input. They must then communicate this workflow to their teams, so that everyone understands what they need to deliver, when they should deliver it, and how their delivery will affect other teams down the pipeline. This smooths day-to-day functioning and minimises the operational chaos that can overwhelm unprepared buyers.
Sell the idea: Integrating two companies often creates uncertainty for key stakeholders. Leaders should clearly explain to their customers what benefits an integrated company will bring to them, and which company they should reach out to for support issues. This minimises customer confusion, and reduces the probability of competitors stealing clients who are unsure of how their customer experience might change.
Leaders also need to sell the benefits of integration internally. Employees may be unsure of whether they will keep their jobs, or how their career progression will change in the new entity. When articulating the advantages of integration, diction is key. Focus on how it will help individual workers, rather than the organisation alone. “New leadership posts will be created to drive our combined product lines” is a lot more relatable than “greater market leadership will be achieved by merging products”.
Decide on a culture: Leaders should first diagnose what differences exist in cultures between both firms. Once these differences are identified, leaders can then decide how to close them: continue with one culture (often the buyer’s) or create a blend between the buyer and the target. Whichever the case, leaders should take time to explain why the culture they want to build is beneficial, and ensure that it is practiced daily. When managerial changes need to be made, buyers should also pick the right leaders who share their vision of what the combined firm should look like.
Focus on the business: While proper integration is important, buyers should not allow themselves to become consumed by the process. It is helpful to commit to a cut-off date where complete integration must be achieved. A good rule of thumb is that 80-90 percent of available time should be spent on continuing to drive the core business forward. Many changes are occurring during the integration period, so leaders must monitor business metrics closely to ensure that the combined entity is maintaining its speed and not veering off track.
Protecting Your Investment
After spending a large sum of money to buy a business, it only makes sense to ensure that the investment is protected from business interruptions that could damage shareholder returns. Proper insurance coverage ensures that the newly combined company will safely produce great dividends in the years to come.
After acquiring another firm, a buyer will have to replace almost all their insurance policies.
This is because:
- Insurance policies of the acquired company cannot be transferred to the buyer.
- Insurance policies often have a “Change of Control” clause that void coverage when a target is acquired.
- Thus, the coverage limits of the buyer’s insurance will either be too low, or simply not applicable to protect both the buyer and target after they merge.
Example: Company A acquires Company B. The buyer will need to replace all their Premise-based policies like Property, Fire, and Money insurance to cover both the buyer and the target’s locations. Other policies like Public/Product Liability and Professional Indemnity will also need to be replaced to ensure sufficiently high coverage amounts.
Protecting a combined business after an acquisition is thus a highly complex issue. It is vital that buyers speak to an insurance expert who can guide them through the process. Click here to arrange an expert consult with our advisors today, or click here to see our full product range.