As your business develops, you’ll debate the different options for growing it further. Buying another company can be great for growing market share, increasing turnover or just taking out a competitor. But what do you need to think about before proceeding?
Getting the best value
Rob Legge is the CEO of Servest Group, which has made eight major acquisitions over the past four years. He says it’s vital to recognise the array of factors that play a role in the valuation process. ‘The potential acquisition or merger needs to consider the growth curve of the business, not only in its future projects, but also historically,’ he explains. Reviewing the prospective client base is important, so too is considering whether diversification provides entry into a new market that is ‘desirable as opposed to turbulent’.
‘When looking to buy a business, buy when they want to sell more than you want to buy,' says James Lamont, head of commercial and corporate at Hart Brown Solicitors. It’s important to agree full ‘but not overly detailed’ heads of terms he adds, which should ‘flush out what each party hopes to achieve from the transaction’. Be careful in the advisers you appoint too – other than knowing what they’re doing, they also need to be aware of ‘the scale and nuances of the deal so as to ensure overenthusiastic or pedantic advisers don’t increase costs unnecessarily’.
Be ready for a long slog
It can be difficult to assess just how much time and manpower will be needed – always plan for more than you think. Allen Gibbons, CEO of IWSC Group, which specialises in M&As for the drinks sector, says, ‘Even if your target acquisition is fully bought into the sale, most small business owners don’t have the resource to free themselves from the day-to-day requirements that come from running their business to focus on the sale.’
Mark Furness, whose IT firm essensys recently secured its first acquisition, agrees. ‘It’s important for small businesses to have the capability and capacity to run the process,’ he says. ‘It can be very demanding and distracting for your senior team.’
A way to cope with this, Gibbons suggests, is to ‘beef up your management team in advance of the acquisition’. If there’s spare capacity at leadership level, you should be able to focus more on integration.
Integration is the biggest challenge
This in itself is a fundamental part of the process. Steve Sharp, founding director of IT consultancy Searchlight Consulting, stresses the importance of aligning IT and business strategy too. ‘Undertake a thorough review of the existing information and technology landscapes across both operations and how the combined processes support the desired business outcomes – such as driving increased profitability,’ he advises. After the review, you should draw up an integration hypothesis to assess how best to achieve your business goals. ‘Look at everything – people, process, information, technology, pace and ability to absorb change, budgets - and a thorough risk assessment is absolutely critical.’
Keep employees in mind
It can be easy to neglect how employees across both firms feel – an acquisition can be unsettling for staff. You’ll need to think about how the process will be handled and communicate why the combined business will work in their favour too. FAQ packs and readily-available information on the staff intranet should help settle any early nerves.
Picking up an international business can be a useful route to overseas expansion, but this comes with its own issues. US-based cleaning and DIY services platform Handy acquired British firm Mopp in late 2014. Co-founder Oisin Hanrahan says the UK was the perfect entry point into Europe: ‘English-speaking with a booming mobile market and a large proportion of key demographic customers – it ticked all the boxes’.
‘The process required careful market research, during which time we realised a truly successful launch would require the acquisition of a company in the space that had already achieved a presence,’ he explains. ‘Pete Dowds and Tom Brooks, Mopp’s founders, had fashioned a highly driven, innovative team with the same vision and values as Handy. For any firm exploring acquisition options, finding a company with a culture and ethos close to your own is particularly important.’ This should also help staff with the transition process – it may not be as big a task as a large company merger, but adjustments still need to be made.
Martin Woolley, MD of The Specialist Works, took over rival media firm TRT in January 2015. The decision was easy to make considering how the two companies’ services complemented each other. ‘TRT had comparative strength in areas like TV planning and buying,’ he says. ‘TSW brought other core strengths in management, new business development and print media.’
However you decide on the acquisition, you’ll only want to progress with one that is developing and building on your trajectory. As Hanrahan says, ‘You should preserve and, where possible, improve the things the other company was already doing successfully – not just change everything from top to bottom.’