Growth via acquisition or merger – a buyers’ guide for SMEs


When buying a company you must focus on four main areas; why you are considering buying, how you will fund the acquisition, the process to be used, and the issues to be considered once the deal is done.

Why (not to) buy?

There could be many answers to this question and in the space available I will deal with the most common.

Completing the offering

Completing the offering

  • One category of buyer is the established company that wishes to “expand” its own business. Expansion could be triggered by a desire to accelerate growth in revenue or profit, or perhaps a wish to move into, for example; a new product or service line, a new market, or a new geographic territory. The actual reason is not that important provided it passes the test of having come from a logical strategy which has been thought through to be clearly good for the business. The transaction will take a lot of management time and effort and it will bring its own problems so, please ensure you are clear that an acquisition will do more for the business than an improvement in organic selling techniques.
  • The second main category of buyer is an individual, or a commercial entity, that has money they wish to invest in acquiring a particular business. This is clearly a financially driven strategy and if it is you spending your own money just be certain that you will get the type of returns you need and that you have fully assessed the risks associated with the acquisition.

There are also some classic bad reasons to acquire.

  • One is the idea that your company is performing badly and an acquisition will fix the problems. It could work, but it is more likely that whatever issues you have which are preventing your existing business from performing will still be there after the acquisition and may well be magnified or in some other way made worse.
  • Another bad reason is to wipe out a competitor – it rarely works.

There are other reasons but I am sure you get the point – only do it if it is a good idea that will deliver enough value to your existing business to justify the hassle.

Preparation

Maintaining a steady ship during an acquisition project is important both for seller and buyer but the issue is often more pressing for the buyer. As the buyer you will need to fund the deal and any disruption to the functioning of your business could have a negative impact on funding by damaging revenue and cash flow, reducing the valuation of the business or reducing the value placed on the business by an external funder hence making it harder to raise funds on good terms.

Advanced planning can ensure the key functions of the business are able to operate smoothly in the absence of key players who are seconded to the acquisition team. Succession planning, robust operating procedures and reliable management information all contribute to the ability to continue “business as usual” amongst the distractions of an acquisition project. The robust operating procedures will also make it easier to quantify the post transaction harmonisation impact.

Funding the deal

The two main options are to use cash or shares in your existing business.  In the case of cash it could be free cash that your business has generated or that you may have as a result of selling an earlier business.  A simple rule of thumb is to ensure that the acquisition will give you a better return on your money than other investment options.  In considering the return, you need to balance risk and reward.

An alternative approach to cash is to raise money through some form of loan. You will need to provide collateral which will either be something that you already have (please NOT your home), such as the asset value of your existing business or the collateral could come in the form of shares in the business you acquire going to the lender. If you are going to raise money for what is known as a leveraged buy out, you need to be even more certain that you will get the required return and that you have done a thorough risk analysis.

By funding through shares in your existing company, known as “paper”, you are in effect saying to the target acquisition “take shares in my company in exchange for shares in your own”. So, your company will need to be quite healthy so that the seller will consider shares in your company to be a more attractive proposition than shares in their own.

Executing the process

The biggest tip I can give you is: use a professional organisation that makes its living out of M&A as they are well worth their fees because:

  • A good intermediary will have a full process to manage all aspects of the deal, they will have a network of contacts and above all they have the skill and experience to get you a good deal.
  • They will approach the negotiation without emotion and they will be able to say tough things to people that would be more difficult for you especially if those people are future colleagues following the completion of the deal.
  • A good intermediary will help you to “see sense” – to them this is a deal and they will not suffer your emotional ties to things that do not really matter – they will keep you focused.
  • They will lighten the work load for you, enabling you to keep your current company on track without unnecessary distraction.

Due diligence;

  • DO NOT skimp on this process of investigation and discovery that helps you to know in advance exactly what you are buying.  Traditionally due diligence has looked mainly at legal and financial matters. These are of course very important but so are many other things including; staff satisfaction and stability, supplier relationships, customer relationships, the effectiveness of the sales and marketing operation, and many other things that make the business work on a day-to-day basis.
  • Don’t get too emotionally tied to a particular acquisition. Be prepared to walk away from a deal if unexpected skeletons appear during due diligence.
  • On the positive side, due diligence provides you with the opportunity to collect information that will help you prepare for the all important process of integrating the new business with your existing business, so don’t ignore the details such as infrastructure, systems and processes, staffing and culture which could add substantial time and costs to the subsequent harmonisation. The devil is often in the detail.

Communication: consider your stakeholders and their likely reactions – try to avoid giving them any sudden, nasty surprises.

Prepare a draft integration/harmonisation plan and factor this into the overall transaction cost.  Be prepared to cherry pick the best of both organisations so long as it doesn’t result in a disjointed system.

After the deal is done

You have inked the deal. You have drunk the champagne and enjoyed the feeling of euphoria that comes from pulling off a deal. Now it is the next morning and you still have a job to do plus a new job of merging the new and existing business. The Champagne celebration may have marked the end of the acquisition process but it also marks the beginning of the next phase of your business life.

At an early stage when you were deciding that you wanted to buy a business, you should also have created the plan to take over, merge and assimilate that new business as quickly as possible. It is scary how quickly the perceived value in an acquisition can turn to dust if you do not hit the ground running with the newly combined or acquired business. You will need to deal with issues relating to; staff, customers, suppliers, banks and many other interested parties. To help with this, you will have gained a good view of the business through the due diligence process and so you should have a detailed plan in place before the deal is finally done.

Summary

  • A decision to acquire should not be a knee jerk reaction to a tactical matter. This could result in a huge waste of your time and worse still could do potentially long term damage to the business
  • The essence of any deal is the word “fair”. There cannot be a deal without a willing seller and a willing buyer and if they are VERY willing to sell be suspicious. Equally do not be tempted to take unfair advantage of people who may soon be your new colleagues.
  • If they are very keen to sell, be cautious and ask is this a distressed sale? You do not want to find that their distress becomes yours.
  • Do not skimp on due diligence; look at the business both deep and wide.
  • Remember the combined entity will be a bigger business that will require a more effective selling engine to feed it. A key area for due diligence is to look at the other party’s sales and marketing operation to see whether when combined with your own it will be able to deliver the required increase in volume.
  • For any deal to make sense there must be a resultant synergy; “two heads being better than one” provided they are not banging against each other.
  • Make sure you have a good process and I recommend that you use a professional, not your bank or your accountant but an M&A specialist.
  • Plan from the beginning of the process how you will integrate the acquisition once you have it.
  • If you are thinking of a leveraged buyout please be very certain that you will generate enough profit to pay off the debt as and when required otherwise they might just take your whole business away from you.
  • Don’t be scared – if you do it right it could be very beneficial – just plan and take care.

Finally, remember, you may have bought a business, but you still have to win the hearts and minds.

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