When selling a business, synergies hold the key

KeyIn business sales, the most successful transactions are those where both parties benefit from the deal.

One of the key roles of the M&A Adviser is to understand the synergies an acquisition would provide to potential buyers. This is essential when preparing the approach to market and selecting suitable acquirers.

The simple result of synergy is that 1+1=3; in other words that the acquirer is able to quantify return on investment to deliver a result that is worth more than the combined value of the 2 businesses.

Certain synergies are easier to quantify and usually relate to operational cost – for example staff costs, production costs, sales and marketing costs.

Others are more subjective and their value will vary depending on the acquiring business. These are generally associated with business activity resulting in reduced business risk and increased growth opportunities. For example, acquiring a key supplier reduces risk in the production or supply chain. Acquiring a competitor increases market share and reduces risk and in some circumstances brings added value such as better processes.

The key point about synergies is that the benefits are cumulative and ultimately become quantifiable.

In a recent transaction, a retirement sale, our Client had an established, successful engineering supplies business. Following a detailed assessment of the business the Evolution team identified that the maximum number of synergies would be in the wider Engineering and Construction equipment sector. This included Private Equity companies specialising in the sector and trade buyers in complementary sectors.

Our Client’s business was long established, still growing and consistently profitable. It had a strong client base, high levels of repeat business and an excellent customer service record. However, it still provided considerable opportunity for growth – in particular through modernising sales and order processing.

Evolution’s highly targeted approach generated 3 acceptable offers – two from trade buyers and one from an equity backed venture with a “buy and build” strategy. Whilst the equity backed venture was attractive, our Client accepted an offer from one of the trade buyers in a complementary sector.

There were many synergies in this transaction, both financial and operational. The successful bidder had identified opportunities to improve sales, margins and customer service that could be applied across several of his businesses. Within a short time frame, new systems and processes were put in place that reduced cost of sale significantly, leading the buyer to believe they would achieve a 15% increase in net margin in the first year following completion even before factoring in the growth opportunities from cross-selling to the expanded customer base.

You can read the full case study here.

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