02/06/2011

By Guy Rigby, Head of Entrepreneurs at Smith & Williamson

Making an acquisition of the right target at the right time can sometimes be the best and most effective way to grow your business. Whether you want to increase your market share, spread your fixed costs, gain better control of your supply chain, diversify your activities or expand overseas, pursuing an acquisition strategy can bring these benefits at a faster pace than organic expansion might otherwise allow.

So is now the right time to consider an acquisition? With ongoing economic uncertainty, funding tight and many business owners concerned about their futures, there may be some very attractive and affordable acquisition opportunities out there.

Some advisers suggest that the best time to acquire is during an upturn or period of economic growth. Certainly these periods tend to see increased M&A (Mergers and acquisitions) activity, but research shows that buying for growth in a downturn can often add significant value.

If an acquisition would suit your business, here’s a checklist of some of the issues to consider:

Acquisition versus organic growth

• Identify the key reasons for making an acquisition

• Consider the alternatives, eg recruiting key staff from your competitors

• Understand the demands that an acquisition will make on your time

• Be realistic about the costs of lawyers and other professionals

• Consider the cultural implications for both businesses

Select your target carefully

• Be specific about the type of target you are seeking

• Prepare a detailed acquisition mandate and identify what you are buying

• Be certain that you have the skills to run the business post acquisition

• Carry out a valuation and set your acquisition parameters

• Ensure you have the financial resources to complete the deal

Try to identify synergies before proceeding

• Consider the proposed structure of the acquisition

• Be confident that synergy is available so that "2+2=5"

• Avoid diversification, which rarely presents opportunities for synergy

• Make sure any apparent cost savings are really deliverable and assess their financial implications

• Consult your sales team on opportunities for cross-selling

Don’t cut corners with due diligence

• Commercial due diligence should usually, but not always, be done by your own team

• Consider external market research where appropriate

• Accounting due diligence should be historic, but should also involve a detailed financial model for the combined business. Don’t run out of cash!

• Legal due diligence should uncover any ‘skeletons in the cupboard’

• Don't forget IT, IP (Intellectual Property), pensions and similar areas

Be meticulous with post-transaction integration

• Be prepared for your senior team to be heavily involved following the transaction

• Don't operate in a mirage of optimism

• Tough decisions may be necessary

• Focus heavily on management and financial information systems and improve them as a priority if needed

• Don't underestimate the time required to achieve a successful outcome

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 robust plan and process to keep you on track.

If you’re thinking about buying a business, contact Guy Rigby on 020 7131 8213, email Guy Rigby or register here to arrange a complimentary corporate finance surgery to assess and discuss your options.

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