Growth through acquisition - challenges and insights
On the 17th October, hgkc, in collaboration with Paul Netto from Haines Watts, Simon Palmer from Qtac and Chris Symonds from Coronation Wealth Management, hosted a round table discussion for business leaders considering, planning or implementing a strategy to grow their business through acquisition. We were delighted to welcome Jason Milkins, corporate lawyer and partner at Roxburgh Milkins, who agreed to be interviewed about his experiences and the major challenges facing any business looking to grow through acquisition, or that might be faced by an owner thinking about se
At the outset, understanding the reasons why an acquisition might be a good strategy to follow is important. Whether the primary driver is strategic (access to new markets, new products or technology, or a larger customer base, removing a competitor) or financial (economies of scale), an acquisition is a strategic investment and should be planned for accordingly. This should include a detailed analysis of the return expected, how it will be delivered and measured, and when it is expected to have materialised. Investment is likely to be easier to get for assets.
Every year, millions of pounds are lost when acquisition deals don’t deliver the returns expected, and often this is down to there being insufficient due-diligence – not just legal and commercial, but including background checks on key personnel; understanding market conditions and how key competitors might see the acquisition; understanding the culture of the company being acquired and what will be required to integrate two workforces together; and understanding the business model and not making assumptions about how it could fit into the way the acquirer works. Shortcuts here lead to a lack of understanding of the business being acquired. A robust legal due diligence will enable the right warranties to be put in place.
It is critical that both sides have good advisors and don’t place reliance on those the firm has worked with before simply because the relationship is already there. Acquiring and integrating a business successfully requires specialists with appropriate experience and expertise.
From the seller’s perspective, it is tempting to reach for a figure that sounds good, often influenced by unscrupulous ‘specialist’ business brokers (who will charge a monthly retainer and therefore have little motivation in completing quickly) flattering to win the business. Gaining a clear understanding of what is needed (as opposed to what is wanted) will help immeasurably in setting expectations.
If the business is not in the right place to sell, it is better to step away and take the time to get the business prepared properly. Commissioning a mock due diligence will help to understand how long it will take to satisfy commercial and legal buyer due diligence; and commissioning a valuation will help determine how much time is needed to grow a business to achieve the desired price. ‘No deal is better than a bad deal’!
If the seller and the potential buyer are unable to agree on an acquisition price, consider an earn out as a way of bridging this difference of opinion.
Business owners – both buyers and sellers - are often their own worst enemies, mentally having completed the deal, or having their ‘million’ in the bank already, and not allowing the time to do the job properly. It’s important to keep expectations in check – picturing life after a sale can lead to hasty decision making or accepting ‘finger in the air’ valuations.
Buying and selling a business is risky. For an acquisition to be successful, there needs to be a better than fair market value return. It is important to understand that offer price and valuation, like other terms in M&A deals, are negotiable. However, since a private company’s shares are not publicly traded, the benchmarks may not be immediately clear, and the outcome of the negotiation will depend on several key factors.
The ability to demonstrate higher cost savings and, thereby higher margins, can create a material increase in deal value. Competent outsourcing partners may provide an option for risk sharing, limiting the buyer’s risk, and minimizing business delivery risk by offloading non-core processes the buyer may be less capable of executing.
Preparation is vital when approaching finance providers, whether debt or equity. This applies both to the business case/rationale for the acquisition and to the due diligence. Neither lenders nor investors will offer if the due diligence is not sufficiently thorough.
Finally, before deciding to sell, consideration should be given to what protection (financial or otherwise) might be appropriate for shareholders and other key individuals. Buyers are should review what is in place to ensure clear understanding of post deal commitments they may be taking on.
"V. enjoyable. Learned a lot. Good structure", Paul Hillis, Sales Director, First Solution Technologies
"Well run. Very informative, Great experts", Phil Warren, Managing Director, Energy and Technical Services
"Really good opportunity to discuss with other owners about different scenarios. Excellently facilitated!" Charlie Stockton, Managing Director, SustainIt Solutions
"Very useful and informative. Given me a lot of food for thought and questions we should be asking ourselves", Nick Thompson, Operations Director, Fiske
"Well structured and controlled with a balance of input from experience & knowledge, skills and expertise", Adrian Edmonds, Head of Group, Tri Group
"Very informative. Enjoy the discussion. Gain a lot of ideas to implement in my business", Mrs Shen Butt, Managing Director, Genie Care Homes