29/03/2012

By Guy Rigby, Head of Entrepreneurs at Smith & Williamson

It may be exciting, but it’s generally accepted that badly targeted or poorly managed acquisitions destroy value far faster than they create it. Don’t be one of the many losers. To get it right you’ll need patience, a cool head and a process to keep you on track.

Here are some basic tips:

- Identify the key reasons for making an acquisition. Acquisitions carry risk, so examine all of the available alternatives before going down this route. If you want to enter new markets, consider appointing agents or distributors. If you need to strengthen your sales force, look at recruiting key staff from your competitors. Making an acquisition may look like your best option, but it’s almost certainly not your only option.

- Clarify your strategic aims and objectives. “Long term strategy is imperative,” says Seb Bishop, founder of Espotting. How an acquisition is likely to help you achieve your long-term goals will dictate which businesses you choose to consider and why.

- Be specific about the type of target you are seeking. Prepare a detailed acquisition mandate. Set out the key features you need from your target — IP, market access, management, production, supply, location etc. “Size is one of the main criteria for the buying business,” comments Brian Livingston, head of mergers and acquisitions at Smith & Williamson. “Too small and the acquisition is unlikely to be worth the costs and management time. Too big and it will unbalance the existing business.”

- Be proactive, not passive. Research the market and actively seek out targets that match your mandate. Circulate your acquisition criteria and work with corporate finance advisers to identify potential targets. Consider the merits of using your advisers to approach your targets. “A financial adviser provides a useful buffer between the target and the buyer,” says Brian Livingston. “Sometimes the fact that the adviser approaches the target is sufficient to elicit curiosity from the target and encourage them to take the call. The adviser is familiar with this world; acquirers are often not.”

- Buy businesses you understand. However tempting it may sound, it can be dangerous to enter unfamiliar territory. “Mergers within the same industry tend to work much better than mergers across different industries,” says Bobby Hashemi, co-founder of Coffee Republic and private equity investor at Risk Capital Partners LLP. “The conglomerate model has been seen not to have worked in the past, partly because people are buying businesses they don't understand.”

- Buy success. If a business is doing badly, find the cause. Buying a good business with poor management is everyone’s dream — a real money-making opportunity. In other cases, there may be good reasons why the business is underperforming. “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact,” says Warren Buffett.

- Look for synergies. Cost saving or revenue enhancing synergies are the main driver in most acquisitions. Consider the back-office or other costs that can be saved by bringing the two businesses together. Look at how the combined customer base can be used to drive your sales. Remember that diversification rarely presents opportunities for synergistic savings.

- Assess your capability. Acquisitions need time, management and money. Consider whether your management team can handle the additional load without damaging your existing business or taking their eye off the ball. Identify your cash requirements and how you will fund the acquisition and growth. Be realistic about the costs of lawyers and financial advisers.

- Don’t forget the culture after the deal, the businesses will be part of one family, but the course of true love never did run smooth. So before you sign on the dotted line, consider the potential for clashes and have your integration plan written and ready to go. “If there’s too wide a gap around values or culture, I would be looking very hard as to whether I had the overall competency to effect a quick culture change,” advises Sir Eric Peacock, an experienced chairman who has bought and sold many businesses, including Babygro Plc.

If you are thinking about buying a business contact Guy Rigby on 020 7131 8213, or email guy.rigby@smith.williamson.co.uk.

Disclaimer
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.

Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.

Smith & Williamson Corporate Finance Limited
Authorised and regulated by the Financial Services Authority. A member of the London Stock Exchange. A member of M&A International.

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