Growth by acquisition is a tried and trusted strategy that allows you to move into new markets or increase your existing market share at a much more rapid rate than would be achieved through organic expansion
Companies hit the mergers and acquisitions path for numerous reasons. These include:
- Reducing competition by buying them out
- Increasing resource in a particular sector
- Buying in experienced staff
- Diversifying into new markets
- Acquiring technology, processes or systems
- Reversing into a business that is performing better than yours.
Your objective will in turn direct your choice of acquisition target and it’s vital that you focus on buying organisations that will help you achieve those objectives. Don’t acquire the first halfway suitable business that is available for purchase.
Growing by Acquisition
Business growth is achieved by obtaining new customers, developing new products, penetrating new markets or through acquisition.
Clearly the aim is to increase the maintainable earnings of the business thereby making it both stronger through diversification and more valuable. The ideal acquisition also enables synergies to be made through economies of scale, greater purchasing power etc.
Other reasons for making an acquisition would be to eliminate a competitor from the marketplace to obtain the skills and experience of particular individuals working in the target business or to acquire the intellectual property rights to various products etc.
Acquisitions are typically part of an overall strategic plan.
Finding an Acquisition
We can assist clients in finding potential targets for acquisition or approaching businesses that have already been selected by clients for an approach. This is done on a confidential no names basis. It is surprising how often this informal approach develops into meaning strategic discussions and thereafter acquisitions.
Negotiating the Deal
Having identified the target we will provide you with valuation advice based on the target’s historical earnings, balance sheet net assets and likely future prospects.
The negotiations can then be undertaken directly by ourselves or principal to principal should you prefer. In addition to negotiating the sales price we will also negotiate the payment terms.
Finally in addition to the agreed sales price and payment terms we can also assist in negotiating other key facets of a deal including minimum net asset levels and working capital positions when applicable.
Getting the Funding
We will use as far as possible the target company’s profits and earnings to secure the necessary funding to make the acquisition.
There is often an element of the consideration that will be deferred and hence can be repaid using the profits generated from the target business.
Unencumbered assets within the target business can be utilised to secure additional funding but it may also be necessary for some of the funding to be provided by the acquirer itself. This can be structured either by way of the acquirer company’s guarantee to the lender or alternatively raising additional borrowings secured against the acquirer’s own business.
We will prepare the necessary financial projections to obtain the funding and negotiate the terms of any new borrowings and related financial covenants.
Getting to Legal Completion
Having agreed Heads of Terms with the target company these should contain legally binding provisions such that the purchaser’s costs would be repaid should the target company unexpectedly withdraw from the deal.
Due diligence now needs to be undertaken which will embrace financial, legal and commercial aspects.
We will undertake the financial due diligence to ensure that what you think you are buying is actually there in relation to profits, assets and recorded liabilities.
We will also recommend the appropriate warranties and indemnities to be included within the sale and purchase agreement to provide ongoing protection to the acquirer.