When a business is considering an acquisition or a sale, whatever the reasons may be, it should always be part of a wider business strategy.
Some reasons why you may be considering an acquisition could be:
- To accelerate growth (acquisition may be faster than organic growth)
- Moving to a new location
- Gaining market share
- Entering a new line of business
- To gain some new technical or business capabilities
Other, less valid, reasons may be to challenge a competitor, covering up for a lack of organic growth or using acquisitions in order to generate growth to meet the expectations of investors or financial analysts. These could have damaging effects on the long-term trajectory of your business, even if in the moment they look impressive in the short-term.
Each and every acquisition comes with its own set of challenges, but the principle behind it must always have the same aim: “two companies with separate ownership unite and operate under the same roof to obtain some strategic or financial goal.”
Whatever the motivation behind it, any deal should always start and ends with strategy, in terms of product, market, location and competitive perspectives.
It’s an unfortunate fact that many entrepreneurs enter into acquisitions that they later come to regret, either due to a lack of planning, integration problems or something else. If your SME is looking to grow through acquisition, how do you know you’ve got the right strategy? You could start by asking yourself the following questions, which will help provide you with a strong direction.
- What does the company want to achieve as a result of the acquisition?
- How will the targets be identified and approached?
- Who will be the team of professionals to process and complete the transactions and what are the costs?
- How will the targets be valued?
- How will the acquisitions be structured in terms of ownership and funding? If applicable how will key conflicts between buyers funding issues and seller value expectations referred to above be resolved?
- How will the culture of the acquired business be aligned to the main business?
If you can answer these questions, you’re already on your way to having a clear acquisition strategy that you can present to potential funders and investors.
As well as this, there are also some basic rules to follow for executing a successful acquisitions.
- Assembling the team
Develop a communicative, internal working team made up of representatives from finance, sales and marketing, and operations. You may also need outside advisors such as lawyers and accountants.
- Initiating a target search
The team should decide if an investment banker will find and evaluate targets or if deal flow will be generated internally through screening, networking and industry contacts.
- Developing a plan.
You can do this by answering the questions above, and this will give you a good grounding. Why are you doing this? What are your specific objectives? How will you finance the deal? You will need to draft a complete acquisition plan that includes objectives, trends and a full timetable for deal completion.
- Pricing the deal
There is no more important question than, ‘what is this business actually worth?’
Generally speaking, market value and capitalisation of earning are indicators. But you also want to consider strategic value. For example, what is the projected earnings stream under the proposed new ownership?
- Financing the acquisition
There are a large number of options available for financing an acquisition deal, from equity financing to a layered transaction. Overall the key factors that affect a structure are the size and complexity of the transaction, the buyer’s cash position, the terms of the purchase price, and market conditions. It is worth doing some research into financing options, or speaking to your bank.
Acquisition is a key way for SMEs to grow, and growth is important for any small business. Although the process may be tricky in some areas, buying another business to augment your existing operation can be a cost effective and timely way to expand your customer base, increase sales and turnover and achieve greater economies to scale and profit.