How to make a successful acquisition

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Stronger market presence, new revenue streams, an expansion of your client base – there are many advantages to acquiring a business. But it’s not without challenges. Steve Anstey, managing director SME division at M&A adviser BCMS, offers 10 tips for prospective buyers

1. Don’t acquire for acquisition’s sake
Anstey says: “One of the biggest pitfalls acquirers make is not having a well-defined purpose. If you don’t have a clear rationale, it makes it harder to locate the right target company. Arguably, it’s better not to buy rather than acquire the wrong business. Acquisition history is littered with examples of companies who have acquired in haste.”

2. Have a choice of targets
“Finding a target is difficult. There isn’t one location where you can find all companies for sale. It’s best to research your ideal target, irrespective of whether they’re for sale, and then make an approach. Or… you could consult a business like us and we can either research on your behalf or have mandates that might fit. Ensure you have a choice of targets too – once you get under the skin of your first target company, all may not be as it seemed.”

3. Buying a competitor isn’t always best
“Buying out your competitor doesn’t necessarily deliver the benefits and uplifting revenues that you are seeking. The better acquisitions tend to be complementary businesses you can use for strategic purposes, such as moving into new markets, good distribution facilities or acquiring different products.”

4. Approaching is easy 
“There are no secret tricks for approaching – simply track down who represents that particular target company, such as the incumbent management team or an adviser, and drop them a line.”

5. Bypass bank funding
“The problem with bank funding is that the [acquisition] price is determined by what you can borrow rather than the business’s worth. Many acquirers have funds already in place, whether it’s on balance sheets accrued as surplus cash or alternative funding.”

6. Don’t be tempted by ‘bargain targets’
“The wrong target, even at a ‘bargain price’, is still the wrong target, as it’ll mean compromising on your rationale for acquiring and won’t be value-enhancing. Pre-2008, hubris took over in many boardrooms, with high-profile companies acquiring wrong companies. We’re still living with those consequences now.”

7. Go hunting goodwill
“The cost of buying a business often factors in goodwill – all the intangible things, such as customers, that the previous owners have built up. It’s valued on the balance sheet by the target company but is hard to agree a price on. It’s also difficult for acquirers to measure whether that goodwill is genuinely of value and whether they should pay for it.”

8. Don’t cut corners on due diligence 
“Appropriate due diligence (DD) is the only way to ensure the company you think you’re buying is exactly what you are acquiring. Lawyers are important but you may want to bring in different specialists. Once DD is under way, the potential for goodwill to be destroyed or a deal to be unpicked by inexperienced advisers is high. Manage your advisers and keep lines of communication open with the target company.”

9. Remember, things can change
“The acquisition period roughly takes 12 months. During this time, the target company may ‘drift’ – revenues or profit may decline, something catastrophic may happen in the target business, or it may lose key staff and contracts. If this occurs, you can walk away or carry on – but reflect that in your price.”

10. Establish a post-acquisition strategy
“Staff in the acquired company will be feeling uncertain, which could result in post-acquisition tension, such as poor performance and mass departures. The key thing here is to win hearts and minds in the acquired business. Be honest and open to any questions asked by staff in the acquired business.”

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