Kevin Uphill, chairman of Avondale, explains how, with expertise and planning, acquisitions can be an extremely accessible and exciting way to build scale in business. However, he warns, the statistics demonstrate the importance of having a well-thought-out and implemented plan
Acquisitions are an important route for companies to keep pace with emerging trends in the marketplace and can also drive shareholder value. The best acquisitions combine economies of scale, synergy and an overall uplift in the combined shareholder value. This means acquisitions are a vital component of strategy.
Increasingly companies are acquiring to build stronger brands, enter new global territories and gain innovation, expertise or intellectual property. Organic growth or competing is always an alternative option for buyers, although in a slow growth environment, as now, acquisitions appeal because they are faster. They are, however, technical and require robust strategy to ensure success. It’s worth noting:
- Only 23 per cent of all acquisitions earn their cost of capital, with only 30 per cent achieving their forecasts
- In acquired companies, 47 per cent of executives leave within the first year and 75 per cent leave in the first three years
- A third of acquisitions achieve an increase in shareholder value, a third destroy value and a third do not meet expectations
- In the first four to eight months following a deal, productivity can be reduced by up to 50 per cent
Here are my top five tips to successful acquisition:
Before you start the process, you need to ensure that your company is best equipped to facilitate a successful acquisition. Ensure that:
- Your growth strategy is clearly defined so you do not stray from your original objectives and timescales. It is easy to be swayed by the attractions of an acquisition, just in the same way you might look at a menu and choose chocolate fudge cake when your goal is to lose weight.
- The organisation (HR, IT, finance, management, systems and processes) is adequately structured to facilitate a successful merger with another company. Can you support new staff and systems?
- Capital investment requirements and funding facilities are realistic. Investigate these before launching into an acquisition project; you don’t want to fall at this hurdle later down the line.
- Internal or external resources are in place to facilitate the acquisition and subsequent integration.
- You and your advisers have the skill to target the right company, the technical expertise to structure terms correctly and undertake the process.
2. Carefully define your acquisition criteria
This will help you stay in line with your objectives and more easily identify those that match your requirements. It can be helpful to think of companies that would be a perfect fit in an ideal world. Consider the following and prepare a checklist of these items and grade each company that you consider, to assist you in decision-making.
- Client base and strong assets
- Effective staff and management team
- Contracted revenue
- Purchase price and return on investment
- Cultural fit
- Sustainability and risk
3. Take time to fully understand possible acquisition targets
It is worth appointing a third-party adviser, to not only help you uncover targets that are not actively selling but also to help you fully analyse the businesses you are interested in and negotiate deals.
Ensure you obtain as much information as possible, preferably before you meet the seller, including:
- Up-to-date financial figures including P&L performance for last three years
- Type and location of clients and client value/split
- Type of work undertaken/contract base
- Staff numbers, roles, locations and length of service
- Premises details, locations and expiry of leases etc.
- Details of owner’s role, profile, age and view of ongoing involvement should a sale occur
- Copies of any literature and copy of standard terms of business
4. Negotiate and get the deal right
Once you have ascertained you could benefit from the acquisition, it is time to meet the owner(s) of the target company. The objective of the meeting is fact-finding. Does the business fit your requirements and, perhaps of equal importance, can you work together? It is important that you establish a good relationship with the owner early on, as it will help secure the transaction. Bear in mind that the seller will have as many questions about your organisation as you do about theirs. After the meeting, carefully analyse the information acquired and work out whether you should progress the opportunity. Go back to your checklist and grade accordingly.
Negotiation is key. Ideally you are looking for a win-win scenario so that all parties are happy. Once you have agreed a purchase price and deal structure, you now move into the legal elements of the process. At this stage it is essential that you employ the services of a lawyer with M&A experience.
5. Invest time in carefully integrating the company
Effective acquisition integration is critical to success and return on investment. Frequently, it is at this stage that mergers struggle or fail. An integration plan need not be complex, but it is essential that you cover all areas. A team needs to be put together to ensure that nothing and no one is overlooked. This team should be made up of experienced decision-makers (although it is worth considering high-potential, enthusiastic junior staff) in both organisations, to provide knowledge and encourage co-operation. Who is the ‘go-to’ person that people seek out when things go wrong or they have questions; it may not be a senior person? Ensure that all departments are involved. Early investment in integration resources will ensure clear understanding of risks and issues and enable realistic planning. The process is complex and it may be worth employing a third party adviser to assist you. Not only will they have in-depth acquisition experience but they will also be able to view the merger from a neutral standpoint.
Motivation is key to successful change management and integration. Be transparent about the entire process. Communicate your plan, keeping everyone constantly informed of plans and reassured wherever possible. Be aware that as the process develops the team’s perception of the transaction will change and therefore you may need a lot of one-to-one engagement.
Acquisitions can sit at the heart of effective business strategy. Done well, they bring a rich vein of new territories, expertise and scale that can accelerate both profits and shareholder value. In the current climate it offers a viable alternative to organic growth. This route to growth is complex but achievable. However, careful planning at every stage and committed, skilled resource is critical to success.
IoD members can access discounts from Avondale, the IoD’s preferred provider of business sales, mergers and acquisition services. To find out how Avondale can help you call 01737 234892, email Avondale or visit iod.com/buyandsell
Avondale will be sponsoring the IoD Buying and Selling Private Companies conference on 17 November at 116 Pall Mall, providing advice and guidance on buying and selling a private business. For more information, visit iod.com/buyingandselling