Many business owners say that they would like to grow their business but get stuck with the practicalities of opening new locations or markets. How do we find good staff? We need to find new customers quickly to pay the bills. Where can we find new premises?
Rather than relying solely on organic growth, many business owners choose to accelerate their expansion by acquiring existing businesses with staff, customers and premises already in place.
It can be less risky to buy an established profitable business than to incur the cost of entering new markets or developing new product offerings using internal resources, where success is not guaranteed.
Selecting the right business to buy and persuading the existing owner to sell is usually the most difficult part of the process.
In practice, most acquisitions by small and medium businesses are either through an approach by an intermediary, engaged by the owners to sell a business; or by knowing the business already as a competitor, supplier or customer. If there is a determined acquisition strategy being followed, then appointing a professional firm to identify targets is often a good approach.
Once the business for sale has been identified, the buyer should start their due diligence on the target company. Key questions are usually:
- Do I fully understand the products and markets the business is in?
- Are these markets contracting or expanding and are there any new products coming to market that would make the existing offering obsolete?
- Does the business have a management team in place to run operations once the owner leaves?
- Do the financial results make sense and are there any issues in the accounts that could impact future performance?
- Are there any undisclosed liabilities that could present a problem in future?
- Are there any regulations that could apply to the business which may create issues?
A key consideration should also be understanding the culture of the business that’s to be acquired.
In this sense, culture means the way things get done in the business – how the staff behave and interact with management, customers and suppliers. If your existing business is based on collaboration and trust but, the target company is confrontational and controlling then it is unlikely that the two businesses will merge together and achieve benefits under new ownership.
Once the answers to the questions are understood then a negotiation on the price to be paid, and the terms of the acquisition of the business can commence. It is important for the buyer to understand the maintainable earning of the business to be acquired. These are the profits the business can reasonably be expected to make in a “normal” year, once the owner has left and the business runs autonomously.
Once the maintainable earnings are settled, an earnings multiple is applied to these to provide an Enterprise Value. The choice of multiple depends on many factors including the reliability of the income, future prospects for the markets you are in and, the general market conditions for business.
Most purchasers will buy the shares in a company as this usually provides the best option for the seller. To establish how much to pay for the shares the Enterprise Value is adjusted upwards for surplus assets such as cash retained in the company and, downwards for any debt the company has on its balance sheet.
In addition to price the payment terms are crucial to the success of an acquisition. It is unwise to put the existing business under any financial strain as a result of the acquisition, so staging payments over time or borrowing funds from a financial institution can smooth the cash flow over the first period post-acquisition.
Financial planning is key and robust forecasts with cash flows are essential.
In conclusion, growing a business through acquisitions can offer many advantages to a growing business.
From rapid market entry and increased market share through to cost efficiencies, access to talent, and improved financial performance, acquisitions provide a powerful route to expansion.
While they require careful planning and execution, the potential rewards make them an attractive strategy for businesses aiming to scale, compete, and thrive in a dynamic economic environment.
