Growing a business through acquisition

SMEs considering growth through acquisition strategies have a number of different considerations to those entrepreneurs starting up through buying a trading business.
For existing SME owners, trade acquisitions carry a high degree of risk, with post-deal failure rates averaging around 50%. Unsurprisingly there are numerous “danger points” along the way, many of which make a successful integration difficult at best; at worst they can cause the new entity to fail completely.

Before you decide whether to set off on the acquisition trail, here are 9 + 1 points to consider.

1. Be clear about your business objectives
It is vital to enter into “buying mode” with clear objectives on what you expect the acquisition to achieve for your business. These objectives must be in line with your business strategy and should include defined, measurable financial and commercial objectives. Without a clear strategy you run a real risk of driving your business downhill. An acquisition will be like driving “pedal to the metal”. Not only will you fall faster, it will be an extremely costly journey.

2. Don’t buy for your ego
Don’t be tempted to buy just because you can; because your business has the cash to invest or because you’ve had an opportunist approach from a company you know. This sounds very harsh but the fact is that many business owners believe that because they are successful in their primary business, they will automatically be successful when they buy a second business. Regrettably, this is not always the case. Be honest about why you want to buy because you will otherwise disregard or dismiss warning signs along the way.

3. Is your management team up to the task?
Integrating another business is more complex than many imagine and it will certainly put a lot of extra pressure on your management team. If they are already maxed out running the current business will they be able to cope with the demands of integrating another company? Do they have the necessary skills to carry it through? If not you may need to factor in a temporary non-exec or a consultant to help you plan and execute the integration.

4. Decide what’s the perfect fit
Profiling your target purchase is a fundamental part of the acquisition process. As well as the obvious financial and commercial profile, it’s important to take into account the soft issues – company values, staff and skills, culture. One of the main causes of post-acquisition problems is down to a failure to integrate people. Effective integration requires your current and your new staff to work together. If the acquired company’s values are radically different from your main business then the ensuing culture clash will almost certainly create issues that will have a detrimental impact on your business.

5. When you find it, get down deep
Once you have found a target and made an initial approach, you must get under the skin of that business. You really need to understand why this business makes money? What’s their competitive model – low pricing, superior quality, customer service etc. Is that model sustainable? Do their accounts and (more importantly) their forecasts support that? Can their assumptions be evidenced? This information will help you to assess how and where gains can be made and how the target business can be integrated. At this stage you may start to see some warning signs. Take time to evaluate them and go back for more information. Taking time and care at this stage will save costs and pain further down the line.

6. Hold your nerve during negotiation meetings
Unless you’re a seasoned acquirer negotiation meetings can be daunting. You’re going to find faults with the target business and the seller may well take affront! No-one likes being told their baby is ugly after all. Nevertheless, it’s important to keep calm and focus on the objectives for the acquisition. Don’t be tempted into unnecessary concessions, financial or otherwise, that may cause problems later on. Equally, don’t put unnecessary delays into the process. Your offer may not be the only one on the table and you don’t want to drive the seller into the arms of a competitive bidder. If this is the first acquisition you’ve made you might consider appointing an experienced adviser to assist you during this phase of the process.

7. Always use experienced advisors
You will need to have an experienced team, usually a commercial lawyer and an accountant, on board to conduct due diligence on the acquisition. This is a critical phase and your team should be experienced in mergers and acquisitions. Due Diligence achieves several objectives. It identifies potential problems of course, but it will also help you to quantify the pros and cons of the business in order to arrive at a final valuation, which will in turn help you to identify potential integration issues. Don’t be tempted to use your usual advisers if they don’t have the relevant experience.

8. Have an integration plan
Your acquisition team will need to put together a plan of how the new company will be integrated. All the internal and external processes need to be in place before you sign the Sale Purchase Agreement. Even for small-scale acquisitions this is a significant project requiring considerable resource from all areas of the business. Make sure your management team is always fully briefed and prepared for the integration.

Ensure that the integration plan includes a Communication plan – both for internal and external communications. You will need to communicate news of the acquisition with your new customers, suppliers and staff as well as with local and industry press. This will be a very stressful time for people in both businesses and it’s easy for rumours to spread. Avoid trouble by having clear and consistent communications with all groups. Even if you haven’t formally told all your staff about the planned acquisition they will be aware that something’s happening. Without a communication plan you may find key staff (including those from the acquired company) are concerned to the point of leaving.

9. Don’t let the process distract you from your main business
It is incredibly easy to lose focus on the main business when the acquisition process starts to gain momentum. This is why you need a strong management team and, from within their ranks, a dedicated acquisition team. Whilst the acquisition process goes on, your existing staff, customers and suppliers should not encounter any drop in response or service quality. The last thing you need is for your core business to slide, so you may want to consider appointing an advisory firm to act for you during this stage of the process.

10. Return to Point 1
Having read the previous 9 points, re-consider whether an acquisition is the best way to achieve your business objectives. If it fits with your business strategy and you’re confident you have the resources to succeed, then enjoy the journey but keep in mind that there are 2 phases of an acquisition – buying a business and successfully integrating it.

In conclusion, successful acquisitions can bring significant commercial and financial advantages; most of the world’s largest companies have grown up that way. Taking risks is part of being in business, but being informed and prepared for the road ahead will help to reduce that risk and deliver the success you planned for.

Rob Goddard is Founder and M.D. of Evolution Complete Business Sales, specialists in business sales and acquisitions. For information about our Acquisitions service please contact him on 0118 959 8224.

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