Five tips for successful acquisitions

While the level of business acquisitions fell in the early days of the COVID-19 pandemic, we have witnessed strong growth in transaction activity in recent months. The initial slowdown was a natural reaction to the uncertainty created by the pandemic and the need to focus internally on the business, to adapt to protect the existing workforce and activities.

As the initial shock has passed, we are now witnessing astute buyers refocusing on growth through acquisition. This isn’t necessarily about buying cheaply, but a realisation that the changed environment presents opportunities to develop long-term growth.

The number of merger notifications to the Competition and Consumer Protection Commission is up almost 60% for the year to date, compared with the same time last year. A wide range of sectors are represented, including healthcare, renewable energy, hospitality, finance, print and packaging, professional services, technology and real estate.

For many SMEs, acquisitions come about opportunistically, reacting to situations as they arise. While this can be successful, stepping back and implementing a proactive approach to acquisitions will deliver better results. 

Here are our top five tips to implementing a successful business acquisition.

1. Think five or ten years out

Before embarking on the acquisition trail, you should consider where you want your business to be in five or ten years’ time. Do you have a clear picture of the future of your industry and how it is changing? It is vital that you take some time to consider transformational trends and how they will impact your business. This will allow you identify areas of opportunity. 

Equally, you should consider any gaps in your existing business – this could be a limitation in capacity, a need to invest in technology, or lack of depth in management. Think about how these gaps could these be addressed through an acquisition. 

By stepping back in this way, you will build a picture of the characteristics you are looking for in a suitable strategic target.

2. Be clear how the acquisition will add value

Carefully assess how the proposed business purchase will add value to the combined business. Businesses create value through acquisition in a variety of ways: 

• Consolidation is one of the most frequent drivers for an acquisition, where value can be created through stronger market positioning with suppliers, customers and employees. Value can be created through cost synergies and greater economies of scale from the combined business. 
• Acquisitions can be a means of building scale quickly in a new market – for example entering a new city or country, or a horizontal market segment. 
• An acquisition may present a growth opportunity to leverage a larger customer base – selling more products or services to the enlarged customer pool.
• Sometimes the rationale for the deal can be gaining access to new technology, manufacturing facilities, intellectual property or a management capability.

You should consider the synergy potential from both an operation and cultural perspective in advance of any acquisition. Do the values and strategy align with your own business’s values?

An acquisition should provide your business with immediate scale and a platform for further growth which would be difficult to achieve organically in a similar timeframe.

Before proceeding with a transaction, you should build a strong and compelling business case for the purchase. If in doubt, you should have the confidence to walk away.

3. Address financing at an early stage

Your means of financing the purchase is important information for both you and the vendor. A well-informed vendor will want to know at an early stage that you have funding in place to complete the acquisition. If not, your bid will lack credibility and may be discounted. For this reason, it is important to address your financing at an early stage.

You may be in a position to finance the acquisition from internal resources. However, many SMEs will require outside funding to assist them in completing a purchase. While traditionally bank debt was the primary form of finance available, today there is a wider range of options available, depending on the specific circumstances. 

There is a vibrant private equity market with funds who are interested in investing alongside owners and management teams. If you are planning to fund your acquisition through a private equity partner, you should line this up well in advance. You will need a comprehensive business plan outlining your growth strategy and the exit options, as the private equity investor will typically have a defined investment time horizon (generally around five years).

4. Consider the impact of COVID-19 on your due diligence

When completing your due diligence, you want to get a thorough understanding of the target business. In addition to your commercial and operational due diligence, you should also undertake comprehensive legal and financial due diligence.

You will need to quantify the impact of COVID-19 on the business. Some sectors have seen permanent growth in revenue due to the pandemic, while others have experienced a short-term bounce in revenue which may recede as the economy returns to normal. Others have been adversely impacted, with their financial performance distorted by availing of various state supports, rent deferrals, customer churn, bad debts and supply issues, among other factors. 

Developing a clear picture of the performance of the target during and after the impact of COVID-19 may not be straightforward. 2020 is likely to have been an abnormal year for many businesses and not reflective of the future. You should be forecasting the medium-term maintainable profits from the business, based on reasonable assumptions.

5. Assemble your team

You will need to assemble a team of advisors to work with you through the acquisition process. This may include solicitors, financial and tax advisors, funding advisors, insurance advisors and specialist operational advisors. It is important that you have an experienced team who you are confident working with. 

An acquisition can be a stressful process, and timely decisions are key. It can be intensive as you manage both your existing business and the numerous stakeholders involved with the purchase. You want advisors who understand your objectives, offer practical advice and can pre-empt issues, so that you are on the front foot and not making decisions under pressure.

You will need to allocate internal resources to oversee the process. A frequent challenge can be balancing the need for secrecy with getting sufficient internal operational input. During the due diligence phase, you should be developing your integration plan for the target business. How will this be managed going forward? Will there be consolidation of functions post-acquisition? If you haven’t completed an acquisition before, it is useful to speak to others who have, to learn from their experiences.

Developing trust and rapport with the vendor is vitally important. Unforeseen issues frequently arise during the process, which are more easily managed and overcome where there is trust between the parties and their advisors. Ongoing communication is important so that the parties can see that everyone is working towards a common objective and that issues are flagged as they arise.

Conclusion

The changed landscape will present many opportunities to build value in your business. We would encourage you to consider how an acquisition strategy can help you achieve both growth and value. Having a proactive strategy is key to success. Be disciplined in pursuing acquisitions that align to your strategic and financial goals.

At Crowe, our dedicated corporate finance team have extensive experience helping our clients grow, buy and sell their business. Our experienced team are here to support you with your expansion plans and fundraising activities. We are ideally placed to help you recognise and maximise opportunities, helping you make smarter decisions today that create lasting value for tomorrow.

If you are considering the purchase or sale of a business, we can help you maximise your investment. Talk to our corporate finance team today.

Read our article 5 tips to managing the business sale process