Whilst selling a company is fraught with challenges, for owners of good, stable businesses who are not desperate to sell, the proposition remains fairly straight forward: prepare the business and enhance its value as much as possible; present it to identified buyers at the right time; create competitive tension; and then review the offers that have been submitted. If any of the offers are acceptable, then you happily proceed with the sale; if they don’t meet shareholder requirements on a financial and commercial level, then it’s back to Plan A and continuing to grow your business.
For companies who are looking to make an acquisition to unlock the next stage of growth, however, the dynamics are much more fluid with several moving parts out of your control. So if this is the path you have chosen for growth, how do you best position yourself to make an acquisition work and be a success?
Have a Clear Growth Strategy
The best companies have clearly defined individual strategies for growth in each market that they operate, ensuring that the various divisional heads and teams all know their specific plans for growth, which then consolidate within the company’s business plan as a whole. Often the preference will be for certain areas to be grown organically, by either creating a new complementary product or service; recruiting new personnel with experience and new skills; or via investment in either new machinery or operations.
Acquisitions should only be considered if they offer significant value up and above what can be achieved organically—i.e., provide significant profit synergies such as enhancing buying power or consolidating overheads; gain entry to a closed market; or access to a new customer with cross-selling benefits. Business owners should ensure that organic growth is being pursued as a priority, fully crystallizing these ‘low hanging fruit’ opportunities. Once this has been achieved, the company is then ready to move onto the next phase of growth via acquisitions, which—whilst offering potentially higher returns—also comes with significantly increased risks.
Review Funding Options
Business owners have numerous options to fund an acquisition—utilising existing surplus cash reserves; securing a term loan facility from a bank, or an asset-based loan against receivables or stock; or seeking investment from private equity in return for an equity stake. Understanding the company’s ability to raise debt and equity finance from the outset will ensure that the board is identifying suitable targets within the correct financial parameters, preventing valuable time and resources from being wasted engaging with opportunities outside of their financial reach.
Additionally, prudent financial forecasting is crucial to ensure that the core business retains sufficient headroom post-acquisition should additional debt be introduced to facilitate an acquisition. This is a vital practice to protect the company should a run of unexpected circumstances (such as loss of key client, delay of projects, recession, etc.) occur.
In conjunction with reviewing your funding options, you must also consider how to structure the deal. Most first-time acquirers are often unaware of the numerous creative options available to structure an acquisition, namely that not 100% of the total consideration necessarily needs to be paid in full on day one. Deferred payments can assist with cash flow, reducing the requirement to leverage as much debt, whilst contingency or earn-out structures can stagger payments, linking them to future performance and reducing the risk in the event that the future profits of the target do not meet historic levels. Experienced advisors will negotiate and assist management teams to minimize this risk and exposure through creative structures, enhancing the value and return of the acquisition even further.
Off Market or On Market?
One of the key issues when looking to acquire is finding a ‘willing’ seller—often companies find that if they approach a competitor or other trade party expressing their unsolicited interest, they are rebuffed. The rationale behind this response is obvious: the target owners do not view the approach as serious, and are concerned about the risk of confidentiality breaches or potentially a data mining scenario. Appointing corporate finance advisors or investment bankers can alleviate these issues and will present the approach as credible, but it still does not remove the fact that the owners may not be interested in discussing a sale at that point in time.
Companies that are being marketed for sale and have appointed advisors therefore remove this issue and are able to demonstrate their commitment to a sale; however, they come with different challenges. If an advisor has done his or her job correctly, then the owners of ‘on market’ opportunities will be informed in relation to the process and their respective value, reducing your ability to structure the deal in terms favorable to you. Additionally, if it is a competitive process, then in order to be successful, offers may need to be enhanced, resulting in you paying a premium above your initial valuation.
Retain the Ability to Walk Away
The biggest issue I have come across in my experience of buy side M&A transactions is the ability to retain clarity on exactly why you are making the acquisition in the first place. Often I see clients become fixated on their capability to integrate and enhance the value of the target post-sale, utilising their skillset, resources and experience to ‘fix’ any issues and achieve significant grow in the short-term. Particularly with entrepreneurial owners, the excitement of a new challenge can mean that they lose sight of the reasons why the target was originally identified, and plan to proceed regardless.
Should diligence or further detailed investigation show that the target does not actually fit the acquisition brief, then the management team has a hard discussion ahead to ascertain whether the original acquisition brief was wrong or requires further elaboration. If it is agreed that the acquisition brief within the larger growth strategy remains correct, and therefore that the target does not meet the core requirements, then that means it is the wrong acquisition. Being able to walk away from acquiring a business because it does not fit the requirements of the company at that exact stage is important to ensure that you are not acquiring a company for the wrong reasons.
There are numerous other factors to consider when making an acquisition, such as assigning responsibilities for each stage including target identification, negotiations and diligence; clear integration strategies involving IT, finances and operations; and the creation of a 100 Day Plan to ensure that the core business does not suffer as management focus is diverted to the target. Delivering all of these successfully will make the acquisition a success, and subsequently add significant capital value to all stakeholders.