Post-acquisition finance strategy

In the run up to an acquisition, many buyers will spend the majority of their time on finance issues addressing how to raise the initial funds for the purchase. However, some of the most successful buyers are those who also prioritise time for planning how to manage a firm's finances post-acquisition.

Clearly, financial considerations will differ depending on whether you're buying a distressed or solvent business, if you're merging the new acquisition into an existing group, or if it will be a stand-alone venture. With a merger, the change can provide numerous opportunities in terms of tax consolidation and the chance to rationalise broader group finance structure. Meanwhile, if you’re considering a distressed acquisition, your targets are likely to be more intently focused on driving the company back into profit and dealing with any leaks in the books.

But while each acquisition has its own set of financial circumstances to contend with, there are a number of tools and tricks that are worth looking into and considering as part of your acquisition strategy. Many pointers crop up again and again, but it's worth refreshing your memory about all of the options available. Some are not mainstream, yet could provide access to many thousands of pounds, potentially delivering the crucial cash difference that makes the difference between success and failure.

But before you start looking at the finance options on offer, your post-acquisition finance strategy needs to address the business' current financial situation and its outgoings. It won't be news to anyone with an ounce of business experience that time can cultivate complacency. When you're working with the same supplier accounts every day it can be easy to lose sight of the bigger picture and maintain practises that might not be the most profitable for the business, simply out of habit.

But as an outsider, new business owners should be keen to wash over the company with a fresh pair of eyes. Addressing different areas of the business should highlight that some areas will need revitalising - for instance, unproductive staff that have become stuck in a rut and are in need of guidance and new leadership.

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It is important to remember that post-acquisition finance strategies should be born out of pre-purchase due diligence, and often form part of the original acquisition strategy. There should be no big financial surprises one you’ve taken over the business!

The importance of cost cutting as a value-creating acquisition strategy
Let’s say the target company had an operating margin of 6 per cent. Costs, therefore, were running at 94 per cent of revenue.

If the acquirer could bring those costs down by three percentage points, i.e. to 91 per cent of revenue, the operating margin consequently rises to 9 per cent.

The increased margin could conceivably add a whopping 50 per cent to the value of the company.
Obviously if the target’s margins were considerably higher than 6 per cent, then the percentage gain in the enterprise value will not be as dramatic.

Nevertheless, this simple illustration conveys the importance of the cost-cutting strategy to many private equity companies and serial entrepreneurs and their keenness to purchase profligate businesses, sometimes even at a premium.
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Staff are the obvious starting point if you're considering cutting costs. With the acquisition of a distressed business the need to cutback is likely to be greater, but there is the slight advantage that the administrators may well have already acted and stripped staff back to a bare minimum to keep their costs as low as possible.

If the business in question is solvent, it will fall upon the new owner to make changes as he or she sees fit. However, personal relationships within the business will make this one of the hardest cutbacks to implement, so if you're going to make any redundancies, be clear about your plans, don't let rumours seep out and try and make the cuts sooner rather than later to avoid cultivating a negative, apprehensive working culture.

However, remember that skilled employees in certain sectors, particularly engineering, are in seriously short demand. So if your business has a team of loyal skilled workers, it’s certainly worth doing whatever you can to keep them on board.

Once you’ve reassessed the company's requirements, you should have a clearer view of where you can keep employees on by refocusing their attention on the more profitable areas of the business; if you've inherited a solid team, most people will be glad to have the opportunity to help the company grow into a new direction. Some might even be keen to move up to management, if there is no existing team in place. This should help to shake up the business from within, using existing talent to build and a strong, reliable and well-informed management team to lead your venture forward.

After getting the team in order, you can collectively turn your attention to assessing the company's stock. This is an area where fresh perspective will be vital. Relationships are established carefully between suppliers and their contacts, but coming into a business afresh should give you the ability to determine which contacts you need to keep and which you can re-evaluate to find the best deal.

While it's true that purchasing processes can fall victim to complacency, this doesn't mean that a new owner should be utterly ruthless. Talk to existing members of staff and establish just what the dynamics have been between your business and its suppliers before you cut off everything in favour of a cheaper provider. There are often cases for quality over price, or there may be cause to maintain a slightly more expensive contract in one area for the sake of savings in another. Talk to your employees, who should be able to tell you the areas in which they have already explored cuts, preventing you from cutting loose a valuable supplier.

After conferring with the staff, it would also be advisable to make contact with the supplier, introduce yourself as the new owner and make your own judgement before deciding whether or not to cut ties. If this is a bolt-on acquisition, there could be areas of your previous company, which could also benefit from a well-established supply chain relationship.

In most cases, stock and staff are going to be much easier to change than a company's location; and of course not all businesses will be viable candidates for a change in location at all. But if you can move then relocating can be one of the quickest ways to cut the company's outgoings.

A leasehold property is often one of the main things holding back a company from moving. However, in some cases you will be able to renegotiate terms with the leaseholders or property managers and it could well be possible to end the lease early, or move to another building held by the same managers. Previous management will often overlook these angles; so don’t assume that it is something that has already been tried in the past when you take on a new enterprise.

Even if moving isn’t possible when you make the acquisition, make a note to revisit it as an option further down the line when the business might be at a more suitable stage to handle the change.

Assessing outgoings and expenses is an ideal first step to getting your latest acquisition's finances in order. But with most acquisitions you will need to go a bit further if you want to give the firm a clean sheet from which to plan future growth. Crucially, you need to work to reduce debts.

One of the advantages of a company changing hands is that it gives the perfect opportunity to restructure. Priorities can be shifted and plans rescheduled to give the business the best shot at growth.

But it's worth remembering that there is a real chance of failure if a business rushes towards unsustainable growth. One of the best ways to mitigate this risk is to ensure that the firm has as little debt as possible and a clear financial base from which to grow, so use the early months as an opportunity to consolidate your acquisition, instead of pushing it to deliver returns before it is stable.

Unfortunately, the change of ownership will of course have brought with it a raft of extra expenses, so it won't be so simple as just diverting finance to cover debts if the money isn't there in the first place. You will most likely need to look at additional options to access capital and keep things flowing smoothly during the handover process, especially if you want to lighten the debt burden in the early stages.

There are a number of financial products that can offer essential assistance to balance paying down debts with the extra financial demands that are commonly attached to most new acquisitions. In many circumstances, these forms of assistance will provide a vital solution to free up cash flow and help secure post-acquisition growth.

Invoice financing is one such option. The product, which is available from Bibby Financial Services and others, essentially allows a company to access the money it is due from invoices instantly instead of waiting for and chasing payment.

With cash flow such a vulnerability for many SMEs, a simple change to the way in which a company accesses its income can make a huge difference to its chances of success and is well worth considering.

Credit control often works hand in hand with invoice financing, and again, is a good option if cash flow is holding your newly acquired business back from growth and expansion. A small credit control team can help take the pressure off a company by chasing down unpaid debt through outstanding invoices and delivering the money to the company’s coffers at a small premium.

Not only will this provide much-needed finance, but it also frees up in-house employees to focus their attention on current business and potential sources of new income, leaving an experienced professional to chase down old debt. Services like this can be particularly useful if the debt was acquired by previous owners and can work well for business buyers looking to move things forward quickly.

Whether you're looking at restructuring existing areas of the business or considering taking out new financial products to reduce the financial pressure on your acquisition during the early stages, planning will be the key with any post-acquisition finance strategy. Don't assume that everything will fall into place as soon as you take possession; in reality, it is the hard work and effort put in to post-acquisition management that is so often the determining factor between success and failure.

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