There are many good reasons to make an acquisition, including an increased market share, diversifying your business, vertical integration and operating synergies. However, buying another business is fraught with risk and many fail. One of the reasons for this is that many acquisitions are opportunistic and not enough time is put into planning.
Therefore, rather than waiting for prospects to come to you, it’s best to take matters into your own hands and actively seek pre-determined targets. This is less easy and takes longer but often results in a better understanding of the business and is the best way to avoid an auction situation.
Identifying the right targets
You need to agree with your team and investors on a criteria for an acquisition defining in detail areas such as business activity, management issues, size, location and how the deal is to be funded. You know your market place and so your competitors might be on the list, but sometimes the best acquisitions are strategic ones, for instance, technological capacity or a foothold in a new market.
Making the approach
If you are going to handle the deal yourself, ensure your approach is sensitive but honest and to the point. Calling an owner-manager and telling them you want to buy their business can provoke a hostile response if handled badly and building a relationship with an owner-manager takes time.
Using advisers
Some entrepreneurs employ a financial adviser, which provides a useful buffer between you and the other business – sometimes the fact that the adviser approaches the target is sufficient to elicit some curiosity and encourage them to take the call. Another advantage is that corporate financial advisers have experience in buying businesses whereas you may not. They will also have a network and be able to draw up a list of targets and have access to information that is potentially useful.
Valuations
There are many ways to value a company and assess how much it is worth to you, including: net asset value; entry costs versus cost of acquisition; discounted cash flow; price/earnings ratio; turnover ratio; and synergistic savings. In many ways, each method of valuation is a cross-check and should not be relied upon on its own.
The key value is what the business is worth to the buyer, rather than what the seller wants to sell it for. You should set in your mind what you are willing to pay but never go over that amount. Remember: You always have the option of walking away and you should be prepared to do so if you can’t get the right deal.
Due diligence
This is when you really look closely at a business in order to assess its credentials and capabilities before making the purchase. You will need the help of accountants and an experienced acquisition lawyer to help you through this and to understand that it can be a very time consuming process. The evaluation process will typically include a thorough financial appraisal, review of published accounts, credit agency ratings and management projections.
It will also usually involve taking industry and personal references to provide reassurance on both the reputation of the business and its key executives. Due diligence is traditionally broken down into four key areas: commercial, operational, financial and legal. All need to be looked at in detail and the results can’t be ignored. If you find anything that is too risky at this point then you are under no obligation to go ahead with the deal.
Integration
The work for this should begin before the deal has been made and your senior staff should be fully briefed on what their role will be; not all of your key players need to be involved and some should be concentrating on the existing business to ensure that it remains of track.
You must be realistic when integrating the two businesses and be prepared to make some tough decisions, such as not taking on staff that you won’t need. Don't underestimate the time that it will take to make this work and draw up a comprehensive plan.
© Crimson Business Ltd. 2009