Mergers and acquisitions: A quick guide
A quick look at buying and selling businesses
Why make acquisitions
Growth by acquisition is a tried and trusted strategy that allows you to move into new markets or increase your existing market share at much more rapid rate than would be likely through organic expansion
Companies hit the mergers acquisitions trail for a host of reasons. These include:
… Taking competitors out of the market
… Scaling up in a particular sector
… Diversifying into new markets
… Buying in experienced staff
… Acquiring technology
… Reversing into a business that is performing better than yours.
Your objective will in turn dictate your choice of acquisition target and it’s vital that you focus on buying companies that will help you achieve your goals. Don’t acquire the first halfway suitable business that is available for purchase. Satisfy yourself that by acquiring it you will further your strategic aims.
Think about how you can minimise administration costs once you’ve made your acquisition. Even if you buy a business that is operating in a different town or region, you should be able to find savings by sharing back office functions such as HR and invoice processing. In the acquisitions market these types of savings are dubbed synergies. If you continue to use separate core functions you won’t be able to take full advantage of the increased turnover.
Mergers and acquisitions eat management time. Many acquisitions fail because the management teams find it difficult to integrate two companies with possibly very different systems and cultures. Think carefully about this in advance and formulate a plan that should be implemented within a few months. Management consultants tend to talk about the first 100 days when all the major changes should be made following an acquisition.
How much do you pay?
It’s a buoyant mergers and acquisitions market at the moment and valuations are high. If you’re looking to acquire a profitable company – rather than a turnaround opportunity – expect to pay top dollar. However, decide your own ceiling and think twice before going above it, even in the heat of negotiation. Always seek help from lawyers and accountants before drawing up a deal, and remember you may be able to negotiate down on price by bringing other tradeables into play – for instance, keeping the seller on as a consultant and basing part of the fee on performance as a future earn-out for the vendor, which ensures you’ll only pay out if they and the company deliver on expectations.
A business adviser will provide guidance. Mid-tier accountancy firms, such as Baker Tilly, PKF and Grant Thornton have in-house mergers and acquisitions experts and are suited to growing businesses. It’s worth engaging a corporate finance adviser such as this early in the process.