Going for gold with your business acquisition success strategy

The Olympic games may be over, but the hard work for Team GB continues as entrepreneurs across the country strive to grow their businesses through acquisition. Companies that survived the recession and have continued to trade successfully, compete fiercely with each other to snap up other businesses to help increase revenue streams.

But even in stronger economic times, buying an established business can offer many advantages over starting a new venture from scratch. An existing business will already have a product or provide some sort of service to an established audience or consumer base. This means that the company’s sector and market will have already been identified and most importantly be generating revenue resulting in an almost immediate return on investment from day one of the purchase.

In this article we will offer you an insight into the gold standard when it comes to making a successful acquisition.


What are your motivations for acquisition?

There are many possible motivations that can drive an acquisition attempt, however most acquisitions take place out of necessity. A good buyer will clearly identify any personal and corporate goals for buying the business in the first place. Typical reasons for purchasing a business include:

Cash flow is often used as a measurement for calculating a company’s value. Increasing the cash flow of your current business by supplementing it with income brought in from a newly acquired business can help your company appear even more attractive to other buyers further down the line.

Expanding your business through acquisition can sometimes help to bring down a producer's average cost per unit as the scale of output is increased. An increase in order levels will often result in a reduction of the cost from suppliers in certain fields.

Increasing your company’s skill base can often clear the path for a move into new market sectors, opening up the possibility of generating new income streams.

Buying a business based on its geographic location can provide strategic advantages by allowing you access to new territories and opening the market up to a new consumer base.

Buyers that do not take the time to clearly identify their reasons behind an acquisition will often find themselves wasting precious time trolling through various sources aimlessly looking at different prospects with no real goal in sight. These type of buyers are least likely to complete.


What type of buyer are you?

Although there can be various reasons behind the acquisition, there are really only two main types of business buyer.

A share buyer is typically interested in owning a majority stake in a business and tends to be willing to accept the business in its entirety and take on full responsibility over all the assets and liabilities including outstanding debts and creditor obligations. This type of purchase is ideal for a current business owner looking to bolt-on the new business to an existing enterprise.

An asset purchaser is more interested in the assets, raw materials, equipment, machinery, or freehold properties owned by the target business. This type of buyer is sometimes considered more of an asset stripper as they will have no real interest in the business in its entirety. The benefits associated with asset purchases come mainly in the attractiveness of being able to pick up certain gems whilst at the same time limiting your exposure to any of the target business’s liabilities.


Successful buyer shortlist

Once the motivations behind the acquisition have been identified, the next step is to begin gathering the necessary supporting documents that will lend weight to your seriousness as a buyer. These documents will be viewed over and over again by vendors, business brokers, accountants, lawyers and various other parties involved in the sale of a business. Having them available will help you to stay on top of many prospective buyer lists and will help ensure that you are kept up-to-date on the progress of any bids.


Successful buyers are those who have the following available:

An opening letter detailing who they are, their motivations for the purchase and a formal declaration of their interest in the business.

A copy of their CV or company profile if they are an existing business owner themselves. These should display the overall suitability of a potential new owner, including their qualifications and corporate achievements - either recent or historical.

If a structured acquisition criteria exists or if the purchase falls in line with an existing corporate mission statement, this is a great opportunity to display any long term goals.

Business references from people within a similar industry as the target business are a great way to solidify interest if they are available of course.


Proof of finances is probably the most crucial piece of information you will have to present to anyone as it clearly displays that you have the means behind you to successfully complete on the deal. Buyers who quickly produce this are often the ones that progress to the final stages of the acquisition process the fastest.
Legal representation is a necessary evil when acquisition is concerned. Supporting documents from your lawyer will help confirm your seriousness to the various parties involved.


Do not be labelled a unicorn buyer

A ‘unicorn buyer’ is an industry term used by many (brokers especially) essentially to describe a time waster. This could be a group or individual that has been blacklisted for making multiple attempts to buy a business without producing any available evidence to support the credibility of their interest i.e. corporate references or evidence of available funds.

Blacklisted buyers will struggle to gain any footing with their acquisition attempts when business brokers are concerned as many are perceived quite simply as time wasters.


Financing the acquisition

One of the most crucial factors to consider is whether or not you have the finances in place to move forward with an acquisition. Don't assume you will get the majority of your finance from the lender. If you are not 100 per cent sure what you have available or what you could raise in regards to finance you will have to start talking to people. Speak to the bank, a financial advisor, family, friends and colleagues. These could all be possible sources for further finance. Get an idea of what kind of capital you will be able to raise under your current circumstances before you make a move on a potential acquisition. Please take a look at our previous article for a deeper look at some creative ways to finance an acquisition.


Valuations

There is no universally accepted way of valuing a business, different businesses will have various perceived values to different people. A seller who has grown his business for a number of years will have a different expectation of value than that of a potential purchaser who may only be considering the company’s current profitability levels. Industry comparables and Discounted Cash Flow (DCF) analysis are the most popular valuation methods amongst the more astute corporate financiers.

Ultimately the only right price for a business is the price that a buyer is willing to offer and a price the vendor is willing to accept. Once a match has been made and the two parties provisionally accept a price, a strong buyer focused on success will begin the due diligence process, crucially examining basic information about the target business that might affect a deal being reached. If any negative discoveries are made, a good buyer will not be afraid to ask necessary questions or express possible concerns to the vendor.


What questions to ask?

A successful buyer is someone who is not afraid of putting in an offer on a business, even if the offer is lower than what the vendor is expecting. Moreover, it is not uncommon for buyers to revise an offer or withdraw completely if the due diligence process exposes previously hidden flaws in the business that may detrimentally affect its perceived value.

Asking questions as simple as ‘is the business really for sale?’ can be key to helping a buyer determine whether the vendor is serious about the sale or merely looking to gauge interest levels with no real intention of actually completing.

Finding out if all of the owners are agreed on the sale is another obvious question that should be asked early on to prevent wasting everybody’s time should there not be agreement.


Structured earn-out periods

It increasingly common for buyers to negotiate on the upfront cash amount payable for the business in favour of adopting an extended earn-out period in which the previous owner would remain.

It is advisable to always structure an earn-out. This may be difficult to do as both sides must agree on a number of points, the main ones being the amount of cash paid up front, the earn-out time frame, the amount of deferred consideration and the basis for the earn-out (how much will be paid on the reaching of predetermined targets and when).


Seller expectations

Our research has shown that over the last four years an increasing number of medium-sized businesses marketed for sale are remaining unsold and on the market for longer periods of time. It is possible to speculate that this may be an indication that in certain cases some businesses may never reach completion as seller expectations remain too high.

Gone are the days when vendors could demand excessive amounts for the sale of their business without being able to display tangible reasons behind their value estimations.


Make sure you are speaking to the right people

Increase the tools in your armoury with access to director details, make sure you are always talking to the right people, even when you are showing a tentative interest. This could always translate to a more serious proposition in the future.


Ultimately, the secret to making a successful business acquisition is quite simple: planning. Get your facts and figures in line before you approach the vendor and you are far more likely to find yourself in first place than somebody who is fumbling for information as they go.

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