There can be no arena more dangerous for anyone with a beefed-up ego than acquisitions.
In terms of business growth, ‘fast yet risky’ neatly sums it up. Purchasing a business that is not in the market for an exit presents a unique set of challenges in talent-spotting and persuasion. But on the upside you get to cherry-pick an organisation that has attributes to strengthen in all the right places rather than bidding for a prize that was not necessarily part of your mid-term business growth strategy.
Rule one of any acquisition is to choose wisely. What are you seeking and how will it affect your organisation in the long run? “You need to know why you want to buy a new business,” says Mark Roy, founder of direct marketing services provider REaD Group. “Don’t buy because it’s sexy – it’s a bloody awful process, so do it because it’s good for your business and have a business plan from the start.”
In January 2006, REaD Group bought direct mail company My Right to Private (MRP) to develop an existing service online; Roy knew he needed an online technology and skilled individuals to make the service work. “We were looking to put our solution online. But we didn’t have the skills in-house and thought the only way we could acquire them was to buy them in. MRP had some great technology, so we approached them to buy their business,” he says.
Identifying targets
You probably already know your market well, so making a list of your rivals is not a bad place to start. The best advice in acquisitions is to stick to what you know, but diversifying should not be ruled out. Look at your clients and customers and consider what other products and services they need or have requested. In addition, talk to your salespeople about requests or inquiries made when cross- and up-selling. Crossselling can be central to making the acquisitions work and should be on your criteria when locating a target. Chris Thompson, MD of Avanquest UK, who has been involved in about six acquisitions of ownermanaged IT companies, explains: “I want to know if I can take that business and create more value by selling its products and services to our customers, and taking what we already have and selling to its customers.”
Detailed information on a potential target and its owner is essential. Much of this can be sourced from your desktop on the company’s website or via news media and offi cial sources such as Companies House. Credit reference agencies, such as Dun & Bradstreet, can also help with required details and also provide reassurance that your target is in good shape.
For a small fee, a number of companies, such as the FD Centre, will keep tabs on a list of potential targets over a prolonged time period. Such advance spending can prove to be a very smart investment.
Some industries such as publishing compile yearbooks, some offering a forensic breakdown of sales. Check the trade press, too – businesses are often more willing to provide details to sector-specific publications. Then there are trade shows and other sectorbased events: good hunting grounds which offer the opportunity to meet potential targets face-to-face and get a sense of their abilities and USPs.
Establishing a relationship with a business you could acquire might make a future deal easier, it could also put you at the front of the queue when the owner decides to move on. Predictably, owners nearing retirement age are more likely to consider this.
Don’t forget your own contacts either. Suppliers or distributors are useful sources of insider information about a business – some of the best tips come from word of mouth. M&A brokers also have a sense of what is rumbling beneath the surface, often able to identify potential targets that are not yet on the market. Getting to know them may bear fruit and lead to giving them a mandate to buy. Acquisitions International (www.acquisitionsinternational.com), owned by BCMS Tradeplan, is a respected player that identifies and approaches on your behalf those companies not formally for sale. If you are looking abroad, seek help from the British Embassy, UK Trade & Investment and the British Library for international directories.
You will have little opportunity at this stage to go through the fi gures unless the company is listed on a capital market such as AIM or PLUS. However, revenue figures of businesses with a turnover of more than £5.6m are fi led at Companies House, and web searches can dig out company profi les – where it is and hopes to be, how it plans to get there, employee numbers and the track record of the founders.
The approach
You only have one opportunity to make a good fi rst impression, so get it right. First of all, employ as much sensitivity as you can and don’t necessarily expect a warm reception. Owner-managers like you won’t warm to cocky or arrogant buyers who seem to expect gratitude for showing an interest.
You must also be able to explain clearly your reasons for wanting to buy. Just as you would, a rival is likely to be suspicious of any approach and is unlikely to reveal an interest in a possible exit straight away – they’ll probably sense you’re on a fact-finding mission rather than making a serious approach. Tact is everything.
Charles Whelan, a partner from corporate fi nance boutique HW Corporate Finance, says: “The fi st thing the target will say is ‘Why do you want to buy me?’ and it is very important to answer this well. Don’t come across like you are carrying out a fi shing exercise.” Nevertheless, even while stating they’re not looking to sell, many owner-managers will be prepared to hear you out.
Some entrepreneurs prefer to make an initial approach by letter. Fine, so long as the letter does not end up in the wrong hands. If another member of staff – the owner’s PA, for example – sees it then it could cause panic at the company and end negotiations before they even begin. To be on the safe side, send a letter to the business owner’s home address, then follow up with a phone call.
You are still far from closing the deal at this point and there is little point attempting to make any sort of closure. Mark Roy recalls the fi rst call he made to MRP: “Initially, they said that they really weren’t interested, but they went away and discussed the idea. Later they decided they would have a meeting and we got moving from there.”
Similarly, when Emma Brierley of recruitment firm Xchangeteam approached BDG Group’s Valerie Gascoyne progress was slow and the two met for a number of informal meetings over the course of a year before the deal was struck (see panel overleaf).
Such informal discussions help to establish a strong rapport and understanding, something that’s important for both parties – you could be working with the owner-manager for some time if their involvement is necessary to close the deal, longer if they are intrinsic to the business’s success. Their motivation behind a sale is also important. If they hope to retire in the near-future but haven’t yet started the exit process, money might be the main factor. If they are younger, they might be attracted to working for a larger corporation to gain experience they can apply in future ventures. Or they may be reassured by the promise of retaining the business as a distinct entity within a group. In each case, as James Turner, a partner at business advisers PKF, explains: “Getting to know your target is the key. You need to be able to ferment a relationship. The softly-softly does have value.”