The more savvy entrepreneurs are making strategic acquisitions. Either buying companies who are competitors, or diversifying a little (such as vertical integration) or a lot (in a completely different sector). This allows businesses to scale much faster than by organic growth alone and can transform the size and direction of a company, almost overnight.
However, business owners should not enter in this lightly as it can be an expensive mistake if risks are not assessed and mitigated. Your strategy should be considered carefully.
Identifying suitable targets
Businesses are bought by purchasers for different reasons, maybe to increase market share and remove a competitor, to widen the scope of your reach to certain sectors or particular customers, or to acquire necessary skills or impressive IP.
The most successful deals are those where synergies are obtained which mean that 1+1=3. Cost savings, especially from overheads, can help with the financial impact of an acquisition so that it makes sense mathematically, but far more impressive is when two businesses with different skill sets or ideas come together and the combination of this pairing brings creativity and results which neither could have achieved alone.
We can work with you to identify which types of businesses and which specific companies could provide this result for you. We would begin by asking you to analyse your existing business using a S.W.O.T. analysis and in particular we would focus on how an acquisition could reduce the exposure you face from your current weaknesses or threats.
Using our databases, we would then consider what size of business would be most appropriate, location and likely value of the company, and begin to make anonymous approaches to business owners which fit these criteria.
How are deals funded?
On the whole, the most common form of finance in the market is actually vendor finance. Deferred consideration has been a staple of most SME acquisition deal structures for many years now and with the pressures on commercial funding due to the pandemic, this will continue to be the case. Government-backed loans may also be used as a very cost-effective option and we would assist you to look at all options when structuring a deal.
Agreeing a payment based on deferred consideration aides cashflow, but when the deal structure is also linked to earnouts dependent upon the level of the business’ future results (turnover, profitability or retention of key customers or licenses for instance) then this means that shrewd purchasers can pick up a deal with little or no risk.
There are several parts of the process which aim to reduce the risk of a buying a business. We’ve already discussed the first one, which is having a clear acquisition strategy. Once you’ve identified a suitable business and an owner who is willing to enter into negotiations, the process rolls out and includes the following steps:
Discussions with the business owner – do not underestimate your own ‘gut feel’ when meeting a business owner. If you are unsure as to the reality of what you are being told about the opportunity, be wary about progressing;
The terms of the deal can be structured to mitigate risk – for example linking the price paid to certain conditions which happen after completion (known as an earnout) or by retaining the vendor in a position where they are still responsible for carrying out certain tasks
Financial and commercial due diligence – we assess the scope of this work according to the potential risks we are most concerned about, and we find evidence to assess those risks more meaningfully;
The lawyers carry out further due diligence, or pre-contract enquiries, to measure the risk around other areas of the business;
Warranties and indemnities are included in the legal contracts as forms of promise or guarantees from the vendor. “Disclosure” towards the end of the deal negotiations provides detailed evidence where the vendor cannot commit to certain clauses and then you can again assess whether you are willing to continue on the same basis;
Integration – whilst this occurs post-completion, it is essential that you have an integration plan which is developed ahead of time. This ensure that you maximise the opportunity brought by the acquisition and that practical issues don’t interfere with the fulfilment of those expected synergies.
We are able to provide support throughout a deal and post-completion, so get in touch if you would like to discuss your potential acquisition strategy in more detail.