In January I completed a small bolt-on acquisition for a client, one which will add 15% – 20% to the ongoing turnover of their business. The vendors were three brothers, all in their 60s, who wanted to dispose of the business to allow them to step back from day-to-day activities. Our client will retain the key staff but there will be substantial savings in other areas.
This transaction highlighted for us an area of significant opportunity for those intent on expanding their business , even in the current subdued environment. Many owners have struggled to keep their businesses alive in recent years, with negligible reward. Particularly for those who have been involved for many years, the prospect of extracting some value and stepping back is hugely appealing, creating an opportunity for those with greater enthusiasm, drive and energy. I have outlined here some particular opportunities that this presents, along with steps which businesses should take to ensure that they are in the best position to exploit these fully.
In the aftermath of a recession, the prizes go to those who emerge sufficiently strong to exploit the opportunities which present themselves. The chance to acquire smaller competitors or complementary businesses is a substantial aspect of this, with the benefits falling under some main headings:
- Instant growth – for a business which has the infrastructure and facilities to grow but is finding it difficult in a stagnant market, a small acquisition can provide an immediate increase in scale and efficiency
- Competitive price – in a transaction of this sort, and in the current environment, the acquirer is in a strong position when negotiating price and payment periods
- Target often underperforming – businesses of the sort described here are often lagging behind due the current owners’ loss of drive and focus. This gives the opportunity to grow that business quickly after acquisition once new impetus is provided
- New customers / products / markets – the combining of contacts, customer lists and product ranges should allow the joint business to work effectively together and accelerate growth and proftability
- New products / suppliers – the acquired business may well not be as dynamic as the acquirer, however there are always gains to be made from combining best practice in areas such as purchasing, stock control or manufacturing
What is required?:
At some point in the future, when the recession is a distant memory, we will look back and wonder why some businesses were able to exploit the opportunity to acquire and some were not. Why will this be the case?
- Access to funding – being able to move quickly and with confidence can make the difference between concluding a purchase and seeing it slip away. Good relationships with funding partners, who understand the model for growing the business and the rationale for an acquisition, make this possible
- A thorough understanding of the working capital cycle and cash flow – acquisitions can present significant cash flow challenges if the implications are not properly considered in advance. Understanding the cash flows of both purchaser and target companies mean the impact can be understood and any nasty surprises avoided
- Sensible advice on valuations & payment terms – an acquisition is only worthwhile at the right price, meaning cost savings, funding costs and payback periods have to be considered. Phased payment periods which reduce the strain on the purchaser are also important. Taking advice early regarding the appropriate price for a target can avoid a fruitless courtship. Getting the best deal structure in place should allow the newly enlarged business to move forward on a stable footing
- Post acquisition planning – too often, the deal itself is seen as the objective, whereas instead it marks the beginning of the real work required to make an acquisition successful. The plan for this should be set out in advance to enable all the benefits which were envisaged to be realised. This attention to detail sets the “buy and build” businesses apart from those whose strategy is more “buy and stack”
- Industry awareness – a business which is clear in its strategy to acquire, and ensures that its industry is aware of this, maximises the chances of any potential vendors coming to its door as part of their exit planning.
An acquisitive strategy is of course not appropriate for every business. This point in the cycle represents a real opportunity for those with a clear strategy of growth. As always, proper planning and execution are essential to ensure the best chance of taking full advantage.