Whether you are acquiring for scale or to sell at a higher value, you need to prepare your business for the best outcome. While a good acquisition strategy is attractive to a future buyer, they will also want to see strong organic growth and proof of a well-run business. A badly run business may present a great opportunity for cost and efficiency saving, but do you have the resources, process, and experience to turn it around?
Expert advisers warn that around 70% acquisitions fail to complete, and those that do could take between nine months and two years, so you need to be clear why you’re making an acquisition and how to make it work.
Here are some typical reasons to acquire:
- Bringing in core competences to accelerate growth faster than developing and building internally
- Assimilating a smaller competitor to give you a major advantage over a larger competitor
- Increasing and expanding a client base quicker than it would take your salesforce to reach
- Taking advantage of a distressed seller or poorly run business that you could make more profitable
- Impressing a future buyer with faster growth and your ability to integrate and improve
Here are some key areas to consider with tips and observations from members and partners for anyone looking to acquire as part of their growth strategy:
Risks to be wary of
While product-based firms can be more predictable than people and service based businesses, acquiring a company doesn’t guarantee that clients will remain loyal, it will not be immune to changes in the market or the economy and it might not have a reliable financial track-record. There could be complications from previous investors, such as too many to manage and complex ownership rights. However, there are ways to manage these and other risks.
Your lead financial and legal advisers should highlight any market or shareholder risk and will undertake due diligence to identify any issues requiring warranties that the vendor will be personally liable for.
Tip: Check if clients are on long-term contracts; if key relationships are with the founder, consider incentivising them to stay on as MD or sales director as part of an earn-out.
Do your research
Having a NED with acquisition experience can help with the strategy and criteria for acquisition targets. Members recommend treating an acquisition like a sales process - find the leads, qualify them, find out what the seller wants, and don’t make the process about you. Popular sources to find acquisition targets include mergerconnect.co.uk or ukbusinessesforsale.com and goldsmithsgroup.co.uk send out updates on businesses for sale.
Look beyond the financial track-record to the story behind the numbers as bad accounting is an indication of the attitude of the owner and an opportunity for efficiency savings.
Tip: Talk to an adviser early to help clarify the objectives of your acquisition strategy as they can help you define the criteria for the right acquisitions and help you find potential targets.
How to approach an acquisiton
It’s an emotional experience for any owner when someone offers to buy their business. Members and partners recommend getting under their skin, understand their motivations, and use language that resonates with them. Some members have created a private webpage outlining their acquisition strategy, how it aligns with their values and with testimonials from previous acquisitions to reassure owners that their business will be stronger and their staff and clients will be treated with respect.
Getting advisors on-board early will show credibility but members advise that you stay in direct communication with the owner to maintain trust as the ultimate decision-maker.
Tip: For discretion, and to get the owners attention, post a letter to their home (info on Companies House / Duedil) to arrive on a Saturday when they are most likely to read it; or use InMail on LinkedIn.
When calculating your price, partner experts advise that you consider the entire P&L and all assets as well as potential elements of value that it will deliver to the business – both commercial and strategic. Also, consider the associated costs, whether it’s integration, investment in new systems, or replacing key staff that are unlikely to stay post-acquisition.
Some members and partners recommend valuing the business creatively; for example, offering cash and shares or an earn-out to value it higher but incentivize the vendor to deliver future growth.
Tip: Partners observe that there is less brand value at the small end of the SME market, with one saying that “no-one has brand value until £100m” but it might be a respected innovator that gives you a strategic or competitive advantage.
Do your due diligence
There are three types of due diligence that you will need to undertake: commercial, financial, and legal. Professional advisers will have the experience and resources to undertake due diligence most thoroughly, so get them involved as early as possible. They will make sure there aren’t any issues with shareholders, accounts, customers, and assets. They will also highlight issues justifying a reduced price (ie ‘chipping’) or warranties for the owner to sign up to.
Members and partners advise looking closely at every single employee contract to see if there is anything linked to salary or share options in their contract; also check the terms of client contracts and see if they have all been sold by the founder.
Tip: Your vendor should have a ‘data room’ so you can access all documentation such as accounts, employment contracts, and client records easily.
What you offer will depend on why you are buying. Is it to acquire assets that will strengthen the financial performance or support the growth of your business, which can help to quantify a price, or is it to consolidate your market position? Due diligence is a key part of the negotiation, as highlighted above, and professional advisers will help you determine a fair price. All members who have gone through the process agree that the best negotiation tool in your arsenal is being prepared to walk away, regardless of how much time and energy you have put into it.
Use advisers to push the vendor while you maintain the founder to founder relationship and step in as ‘good cop’ if needed (members also recommend capping your lawyer’s fees as they might keep chipping away at the price which could deter the vendor from selling).
Tip: Members caution against ignoring issues close the deal (‘deal fever’); they might be small in isolation but combined could be catastrophic so refer it to your adviser.
There are various options for funding an acquisition, from private equity (PE) and VC to debt finance. Members have rated Business Growth Fund (www.businessgrowthfund.co.uk) for both PE and VC, Beringea and Octopus for VC, and OakNorth Bank for debt finance. Members also rate advice on funding options from corporate finance advisers including Cavendish Corporate Finance (Caroline Belcher) and Buzzacott (Matthew Katz). A good FD and NED should also be able to advise on the best funding options for an acquisition.
It’s always good to build a good relationship with your bank when you don’t need to borrow, then borrow small amounts and prove your ability to repay; and keep close to your projected financial performance to prove reliability.
Tip: Members recommend that you consider the impact of buying a business on your cash flow as their income won’t flow in immediately and there will be various costs related to integration.
Signing the deal is only the beginning. Partners and members warn against underestimating the time and cost of integrating two businesses and recommend a solid plan that you stick to and be prepared to double resource if needed. Members observe that integrating back-end systems is the biggest challenge and recommend bringing in contractors / outsourced support to maintain business as usual.
Customers may not want to migrate if it’s a hassle, and if values appear to be at odds with what they have come to expect, so members advise that you invest in maintaining front line sales and customer support.
Tip: Members advise a 6-month hand-over so you can properly learn how the business works, but recommend making hard decisions early as uncertainty will demotivate everyone.
People are the greatest asset of any business. You may uncover ‘diamonds’ you didn’t expect but consider the recruitment costs of replacing key hires and factor this into the purchase price. Members have various tactics for finding out who contributes most value, who are at highest risk of leaving (and why), and who they can afford to lose. If the owner is staying in the business after the sale they will be motivated to help you retain the best talent. However, sometimes the owners are the obstacles to growth so try to gain that insight through the due diligence process.
The founder might help to migrate customers and keep talent during integration, so retain them as a consultant or put an earn-out / deferred payment structure in place to motivate them.
Tip: Members stress the importance of communication, both to your existing team and those who have been acquired, with regular updates and consistent messages to help them adapt.
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