Growth by acquisition: Doing deals with reluctant sellers

Growing Business uncovers the delicate art of buying from a reluctant seller

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 (, 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.”

Getting the advisers in

The jury is out on the matter of when to employ advisers. Not surprisingly, the advisers we spoke to, corporate or legal, said they should be involved from day one. Indeed, some corporate finance boutiques will steer the entire process, from making the first approach through to signing the deal. However, many of you will feel more than capable of making your own deals, or at least of setting the wheels in motion.

“Some people put advisers in straight away but I think that with owner-managed businesses it helps for people to see each other first,” says Roy. “Let’s stop the romance straight away. A business deal is about sitting down with the guy, looking them straight in the eye and saying, ‘How much do you want to sell it for?'”

Not so, says Mike Tobin, chief executive of TelecityRedbus. “If you’re going to use advisers, you might as well bring them in up front otherwise it’s a waste as they are still going to charge you. There are going rates and you won’t get a reduction.” Either way, you may want to structure corporate finance fees according to success or a percentage rather than fixed costs.

The first step when deciding on advisers is to assess the experience already in your team. Some people rely on finance and marketing directors to assess the numbers, brand value and opportunities. If yours have the skills to perform thorough due diligence and ensure the books add up then lucky you. You might consider it for smaller deals. If you don’t, you will have to get the suits in.

That said, only start revealing sensitive information about yourself once a non-disclosure agreement is in place. Once accountants and lawyers start going through the books, skeletons can fall out of closets, some of them large enough to end the deal. If this is the case, be prepared to walk away. N

Negotiating terms

Once the vendor has agreed to sell subject to terms, the final negotiations can get under way. These will largely focus on the price and can lead to a lot of eyeballing as both sides look for the best deal.

Graham Palfery Smith, CEO of IT recruitment company Greythorn, likens the final negotiations to a game of poker. “It is the hand you don’t play which is the one that wins the game. But you have to be prepared to walk away if the price is too high,” he says.

Different companies are valued in different ways. However, the price will usually involve profits and a multiple of between five and eight. Colin Mills, founder of the FD Centre, says: “If you are going much below five or above eight, you are starting to enter into ‘happy land’. However, I have seen deals go into multiples of 10-12 when there has been good synergy.”

Another big issue to resolve is the fate of the business founder. This is a tricky area because good owners of businesses don’t always make good employees. The workforce may also become confused as to who is the boss. However, you risk losing a vital part of what makes the business work if you let them leave.

Unless the owners are intent on retiring, you should try to find them a suitable role in your organisation, one where they can still add value but where you are the boss. In addition, you must make sure that they don’t leave to go into competition against you. Non-compete contracts are standard and you should make sure a lawyer prepares one for you, otherwise you risk seeing your acquired revenues going back to the person you bought them from.

Many acquiring companies still favour earn-outs, but many advisers we spoke to suggested these should be seen only as a last resort. The problem with the earn-out is it can become the driving force for the vendor. It can skew your business strategy or leave you weak in areas you had entrusted to the vendor as they strive to hit profi t targets. Vendors are also often wary of earn-outs because market conditions can change post-sale and what was once possible no longer is.

Preparing for post-sale

A change of ownership can lead to demoralised staff, unless you are ready to nip it in the bud. TelecityRedbus’ Tobin, whose company bought Globix UK, recommends a “strong communications strategy” to let the workforce know what is going on and what it means to them, and there is no substitute for getting out there and meeting employees face-to-face.

There is arguably never enough preparation you can do for this potentially unsettling period. You need to hit the ground running and get the integration process under way from the start.

If you’ve prepared adequately it should be feasible. Then you only have the surprises to look out for.


1 Choose your target wisely. It is essential to know exactly why you are buying and it?s better to make no deal than the wrong one.

2 Approach sensitively. Many owners are likely to be on the defensive when you make your initial approach, so softly does it.

3 Look for similarities with the company. If the cultures of the company don?t match there could be problems post-sale, so look for synergies.

4 Be prepared to walk away. Some deals just aren?t there to be made and if the negotiations aren?t yielding what you want, look elsewhere.

5 Get all the advice you need. If you have corporate fi nance and legal teams then lucky you, but if not then either hire the advisers in or spend the rest of your life regretting it.

6 Beware of companies that revolve around one person. Some fi rms are the image of their maker and just don?t work without them.

7 Look for a ?win-win? situation. Both parties should feel they have gained from the deal and in the best deals they usually do.

8 Over-prepare for the post-sale period. Because you need to hit the ground running there can never be enough preparation for day one.

9 Be patient. Acquisitions of reluctant sellers tend to take months if not years to complete, so don?t expect deals to happen overnight.

10 Keep driving the process. These things can stall so easily ? it?s up to you to ensure that people do not get bored and drop out.


(will not be published)