Business acquisitions are carried out for a wide variety of reasons, from individuals seeking to invest in their future, financial investors or existing trade businesses responding to changes in their market, generating cost-savings or providing important integration or cross-selling benefits.
Plan Your Acquisition
If you know where you want to be it is easier to work out how to get there. Take account of expectations in terms of earnings and security of income, and intangibles such as longevity of the businesses life cycle, economic trends and the suitability for integration into any existing operations. Consider carefully the ability to manage the sale process, and any post-acquisition integration, without a detrimental impact on your existing business.
Choosing Targets
Choosing the right target depends on the motivation for making an acquisition. The principal reasons why businesses make acquisitions include:
- The need for speed - in a world where everything is moving fast, making an acquisition can instantly open the door to new markets, new geographic locations and new business models, as well as new customer and business relationships that might otherwise take years to establish through organic growth.
- To expand the brand - companies may seek to acquire people with unique capabilities, relationships, and positions of leadership, unique assets such as domain names and web sites, or brands which have established special and unique value and that will thereby increase the value of the combined organisation.
- To prepare to gain market share - sometimes companies see an acquisition as simply a way to get more of a good thing and capitalise on the economies of scale. Gaining market share can often allow an organisation to control the market and raise rates.
- To reduce costs and control quality - companies may acquire other businesses within their supply chain to enable them to reduce costs, control quality, and increase profits.
- To preempt unwanted competition - sometimes companies acquire other companies to prevent a potential competitor from entering their market, or to prevent a company from being acquired by another competitor that could then leverage the asset against them.
- To add critical value to an under-performing organization - sometimes a company will be floundering by itself, but in the hands of an acquirer with the right resources and connections, it can be turned into a much more profitable venture.
- To diversify and reduce risks - with the dynamic pace of change in Ireland, we sometimes see companies diversifying by making acquisitions in related businesses that offer synergistic business models with less inherent risk.
Having decided on your reason for making an acquisition, you then have a number of channels for identifying potential targets:
- Direct approach is still the most common method of identifying whether a business is for sale. The key to driving at an acquisition is pro-activity. Don’t wait for market opportunity. Successful companies make opportunity. This means actively targeting deals where vendors may not yet have thought of a sale. The more targets you approach, the more choice of vendors, the more likely you are to achieve a deal on acceptable terms that matches your key criteria.
- Your own industry sources may know of businesses for sale within your market sector
- Company Brokers will often have a number of businesses for sale in a wide variety of sectors. There are a number of specialist company brokers and most of the large accountancy firms have M & A departments which may have suitable businesses for sale
- Many business owners will be approached by a target company seeking to effect a sale. Buying a company that is looking for a buyer can often be convenient and easy, but isn't always the best choice.
- Occasionally, a newspaper or magazine advertisement can generate a transaction but this is still relatively rare.
Even where careful planning has been undertaken, it is important to recognise that acquiring and managing companies is not for everyone. One thing is certain though, the success of such an undertaking improves with experience. Without such experience, it is prudent to take the plunge with relatively small, digestible targets in mind. In spite of this cautionary note, a number of well researched surveys indicate that acquisition based companies outperform those which have not acquired.
The Seven Key Factors
The seven key factors for a successful acquisition are:
1. Timing
2. Price
3. Currency (i.e. are shares being paid or cash)
4. Research by the management team
5. Confidentiality
6. Plans for the future of the target business
7. Securing employee long term support
The Right Advisors
Having the right team in place from the outset, working with you towards a clear strategy is essential. Work with experienced advisors, prepared to take decisions and give opinions - particularly difficult when the advice may be to withdraw from the transaction at a late stage. Advisors can help with:
- Identifying opportunities/research
- The information/background gathering process
- Market, geographic and demographic information
- Negotiations
- Valuation advice
- Fundraising
- Integration advice
- Due diligence investigation
- Legal, taxation and financial advice
- Confidentiality
- Allowing you to continue running your existing business whilst undertaking the project.
Approaching The Targets
In the pre approach stage the key considerations are generally:
- Formulating initial views on likely valuations
- Confidentiality
- Who should make the approach and when
- Who to approach
- Negotiating terms
When agreeing terms, valuation and price are important but acquirers should also take considerable care to maintain the vendors’ goodwill. Acquirers should be warned that personalities and emotional ties often affect even the best-managed deals. Patience and understanding are essential and acquirers may have to allay fears regarding their intentions in the future ownership of the business. In other words they may need to sell their intentions. Successful acquirers will always go out of their way to keep matters simple, honest and approachable.
Acquirers should be very careful to understand the needs of the vendor regarding handover and future management as this is a crucial concern for most vendors.
When considering valuations, acquirers should also remember that most vendors would seek recognition for their hard work in a business, which might not be reflected in the financial performance. A good idea is to understand the value from the seller’s perspective and bear this in mind in your discussions, whilst also having a clear appreciation of the value to you.
There is a common tendency in buyers to comment they are not paying ‘for potential because, ‘you can’t value it’. This is not always correct. The nature of purchasing goodwill is that you are purchasing tomorrow’s income. Indeed a business that is could be expanded at a rate of 40% per year is worth considerably more than a business that could only be expanded at a rate of 10-15%, per year even if the profits and assets are the same today.
Once conditions have been agreed in principle, a Heads of Terms, outlaying the key aspects of the proposed transaction, is normally drafted to ensure understanding and clarity between the parties. Acquirers may be granted a period of exclusivity to further investigate the business unimpeded prior to completion. Further confidentiality undertakings may be required before sensitive key information such as customer lists can be investigated.
Investigating The Target
Once you have agreed terms, it is essential to check the business is as presented. This check or detailed investigation is called due diligence. It should be conducted carefully by professionals as it could significantly affect your investment. Due diligence investigations can take weeks rather than days.
For more information on financial due diligence click here
Cultural Due Diligence
Many buyers concentrate on the financial, legal and commercial aspects. They forget businesses are run by people.
Spend time and money on getting to know the people you are buying, and make sure they are a receptive and flexible team. If you are buying a business you intend to change make sure you buy a team open to change.
Once due diligence has been satisfactorily completed legal contracts can be finalised to include protection against any issues highlighted. There may also need to be a review of the price and initial terms agreed if the due diligence has shown adverse results.
While the Deal is Being Processed
During the pre-contract stages at due-diligence, give consideration to planning any changes you may intend post acquisition. For example, changing management, training new staff, ensuring cultural integration, maintaining customer and sales focus and planning motivation.
Additionally, it is important to clearly manage both existing staff and customer’s expectations of the transaction for the future focus of the business. A substantial amount of time should be dedicated both before and after the deal to this change management. Using the due diligence information to help formulate these plans gains extra value from the due diligence process rather than it just being a checking exercise.
Contrary to popular business opinion, most chief executives agree that any changes required on an acquisition should be done sooner rather than later. In general, staff and customers cope better with fast but well managed changes. This is easier to do with larger companies, although with individual purchasers it may make more sense to watch and observe to understand the business more fully over the first few months before making any changes.
What Next?
Completion is not only the culmination of a successful transaction but also the start of a new phase in the enlarged business. The challenges ahead are often significant, cultures are different, new strengths and weaknesses come to light and re-appraisals of the newly enlarged operation need to be undertaken quickly and efficiently. A well-managed acquisition process should therefore not stop at completion but have an active plan and strategy for the integration and management of the target business following completion.
It is often useful to ensure people involved with completing the acquisition are involved subsequently, to benefit from the knowledge, information and relationships they will have developed in the acquisition process. This will provide the best springboard to meet the challenges and opportunities going forward.
Think carefully before changing the brand of an acquisition, or indeed the merchandise mix in the case of FMCGs. This has the potential to lead to problems with customer loyalty and it is worth remembering the old adage: It is easier and cheaper to retain existing customers than to attract new ones. Give people what they want.
Why Use O’Hare Donohoe
There are a number of reasons for choosing O’Hare Donohoe to act for you in acquiring a business. Our extensive experience of completing transactions gained in practice and industry means that we can offer:
- a professional and structured approach to finding the right acquisitions with a proven track record
- an increased likelihood of opening positive discussions with targets
- time savings by enabling management to concentrate on existing business.
- cost effectiveness as we won’t be “learning as we go”. In addition, we can structure the majority of our fees on a success basis to suit your project.
- reduced potential for costly mistakes.
- greater probability of the deal completing on favourable terms.
If you would like more detailed information on how to go about acquiring a business please contact:
Patrick O’Hare
Tel: 046 943 7900
Mob: 086 608 8869
Email: pohare@ohd.ie
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