Articles

About Management Advice - specialists in buying or selling businesses

News and Articles

Taking advantage of the downturn

With the state of the economy as it is at the moment, many well run businesses with good models for making money are under threat either from defaulting customer, cash starvation or lack of perceived opportunity to grow and develop.

At times of difficulty, the best of business comes to the fore. The well run, well capitalised business with a good product or service offer will survive whilst those with lesser offerings or strength will fall by the wayside. Now, then, may be the perfect opportunity to consider a merger or acquisition to further improve your business prospects for the upturn - when it comes.

Acquisitions can be both offensive and defensive. Taking over a competitor can bring instant market share and scale efficiency not available before. Equally, seeking to merge with a complementary business or product line can bring fresh opportunities to secure a healthier future income stream.

No matter what the reason, there are a number of factors to consider and to be aware of so as to make an acquisition or merger a success.

Firstly, most businesses depend upon their employee for their success. This leads to the fact that putting two businesses together, in whatever manner, mean two cultures coming together. Therefore, make sure you understand the culture or `the way they do things` of the organisation you are buying.

Next, make sure you stay rational and not emotional. You need to be objective - this is a business decision even though it may be a personal goal or lead to enhanced personal prestige. If you can't stay objective, make sure you have advisers that can - and listen to their advice!

Be clear of what you are going to do after you have acquired the business. The goal is not to acquire - but to make sure that the resulting business is better placed than before to make the best of the market. Therefore, you must have a clear strategy for the business post acquisition that kicks in immediately. You will lose hearts and minds of employees if you do not have a clear sense of direction and decisive early actions.

Finally, the price. In these turbulent conditions, traditional business valuation tools may not give a sensible answer. Make sure that you are looking at the most recent trading position and not the last audited accounts and look to cash generation above all else. Your aim must be to pay down any debt borrowed to fund the acquisition as quickly as possible based on the strategy and the only way to do this is if the final combined business generates sufficient cash to make this happen.

There is no set formula on how to buy a company, however, common sense and good fortune will be needed in plentiful supplies.

Why make acquisitions?

Acquisitions should be considered as part of the overall strategy for any business in any sector. Acquisitions can be part of a strategy to:

* Solve a problem * Kick-start growth * Diversify * Enter new markets * Develop new products * and many more……

The key is that acquisition should be part of a strategy.

However, acquisitions have a poor record of success and understanding the risk that you are taking is crucial. One way of looking at risk is to use the Ansoff matrix. This was first published in 1957 as a way of categorising market strategies, but it has equal relevance when thinking about acquisitions.

We offer detailed analysis and workshops and training to help you develop an acquisition strategy.

Examples may make this easier to understand. In the UK, a number of household names have successfully used acquisitions as part of their strategy.

Market extension through acquisition

Tesco acquired T&S Stores – a chain of convenience stores - as a means of entering a new market sector, but using the same products it distributed in its larger stores. In Ansoff terms, this is a market extension strategy.

The acquisition of T&S Stores enabled Tesco to start operating 800 convenience stores the day after the acquisition. Consider the alternative of organic growth, and the amount of time, effort and resource required to achieve similar foothold and you can see how acquisitions can provide a shortcut to success.

Market Penetration

In the same sector as Tesco, Morrison’s acquisition of Safeway represents Market Penetration. Although this is intrinsically lower risk, it has taken several years for this acquisition to bear fruit, at least partly because the Morrison’s management team underestimated the resources required to integrate the two businesses.

Product Development through acquisition

is very common in the IT Industry and one illustration is Sage Software’s development of accounting and ERP systems. Sage began as a provider of accounting systems for the smaller businesses, but through a number of bolt on acquisitions can now offer systems for businesses of many different types and sizes.

Diversification is the strategy with the highest risk

This was very common in the 1970’s and 1980’s. You may remember Hanson Group, Willams Holdings and others acquiring substantial, unrelated businesses. More recently, diversifiers have looked for some commonality of customer, product or service, positioning the strategy close to the very centre of the matrix. Such “related” diversifications are much more likely to succeed.

These are examples of strategic acquisitions completed by substantial companies. We specialise in bringing our knowledge, skills and experience to bear in the SME marketplace, helping owners and principals make successful acquisitions. Please contact us for more information

Routes to exit your business.

Key to choosing the right exit route is what you want from the sale. For many owner managers, the continued employment of the team who have helped grow the business and the continued success of the business carry a significant value.

These are broad categories and are by no means mutually exclusive.

One way of ensuring the future of the team – or at least giving them control of their destiny – is a Management Buy-Out (MBO)

MBO deals are often quicker than a sale to a third party as the buyers already know the business, but there are some disadvantages to consider:

An MBO team is unlikely to be able to match the value offered by a trade buyer as they will not achieve any savings by combining businesses.

The MBO will probably have to take on debt (or even equity) financing from a bank or other financial institution. This is a significant commitment for the management team and will almost certainly require that they put personal assets at risk. In the current climate there may well be difficulty raising the finance.

The vendor will have to accept payment over a longer period of time, so that it is not a clean break from the business which is now run by someone else – even though they are still using your money!

Consider the fall-back position. How will the relationships between you (as the owner) and your management team (as prospective buyers) work if a mooted deal fails to materialise. Will the business be damaged by a management team with poor motivation?

Is your management team up to the job? MBO deals have a very strong track record of success and are consequently relatively easy to finance, but often in the smaller business the vendor has been the entrepreneurial leader. That leadership is a vital part of the team which may not be a characteristic of the remaining members

Some of the problems inherent in an MBO deal can be reduced or even eliminated through a Buy-In / Management Buy-Out (BIMBO) type of deal.

In these deals the existing management team is joined by one or more external individuals. Typically, these are experienced senior managers who are seeking the leadership role that was not available to them in their previous employment.

These problems still remain:

A BIMBO team is unlikely to be able to match the value offered by a trade buyer as they will not achieve any savings by combining businesses.

The buy-in members of the team are strangers – not only to you, the vendor, but also to the other members of the team. BIMBO deals have a good track record of success, but often members of the team fall by the wayside as the new leadership becomes established.

BIMBO’s are often backed by financial institutions (Venture Capital) who set demanding performance targets and are quick to act if these are not met.

One of the more obvious routes to exit is a Trade Sale which is a sale of your business to someone already operating in the same marketplace. This is often a competitor.

You will get full value for a sale to a competitor, but

Your business, as you have created it, will be changed dramatically.

The management team and staff may not have future employment.

Approaching a competitor is a high risk strategy

Similar challenges apply to selling to a supplier, but there may also be issues with continuity of supply. If you sell to one of your suppliers, will they want or be able to buy from your other suppliers?

In the same way, selling to a customer has challenges – they may not be able or willing to sell to your other customers.

A sale to a Diversifier is a sale to another business not already operating in your marketplace. This can be advantageous but again, the diversifier may not be able to match the offer from a trade buyer as they may not achieve synergistic savings.

Finally, a sale to a Financial Buyer is a sale to a hands-off investor who does not wish to take any part in the day to day management of the business. This buyer may appoint their own business leader, or they might combine with the existing management team in an MBO.

In all cases, having an experienced well connected advisor working with you to achieve your goals will remove a lot of the FUD (fear, uncertainty and doubt) factors.

Typically, you only sell your business once and it is important to get the best possible outcome.

For a free no obligation discussion please email or contact your local office

. Home | Profile | Services | Resources | Contact