There's a reason we're the Global Number 1 provider of part-time CFOs

Call us on (800) 919-4022

1

Growth Through Acquisition

To accelerate the growth of your company and organic growth doesn’t appeal, consider merging with or acquiring another company.

Such a move can help business owners like you to grow your top line and profitability, says the FD Centre’s CFO East of England North, Lynda Connon. 

A successful merger or acquisition can also give your company access to your target company’s technology, skillsets, markets, and target customers.

If the target company is in a different industry, the merger or acquisition can help to diversify and mitigate risk. 

Considering a diversification strategy like this is valuable if there is any doubt about your company’s prospects for long-term profitability.

The standard form of an acquisition is when one company (the acquiring company) buys another company. 

It does this by either buying all the shares in the acquired company or by purchasing its assets. The shell company is then liquidated.

Likewise, there are several types of mergers, including:

•         Horizontal merger (in which you merge with a company in your industry)

•         Vertical merger (in which your target company is at a different production stage or place in the value chain)

•         Product-extension merger (in which your target company sells different but related products in the same market)

•         Market-extension merger (in which your target company sells the same products as your own but in a separate market)

•         Conglomerate merger (in which your target company is in a different industry and has different products or services).

Growing your business via a merger or an acquisition has many benefits, including the following:

•         To achieve a lower cost of capital

•         To improve your company’s performance and boost growth

•         To achieve higher revenues

•         To reduce expenses

•         To achieve economies of scale

•         To diversify your product or service offering in your existing markets or move into new markets

•         To increase market share and positioning

•         To achieve tax benefits

•         To diversify risk

•         To make a strategic realignment or change in technology

•         To obtain new technology, more efficient production, or patents, and licenses.

Dangers of mergers and acquisitions

As beneficial as mergers and acquisitions (M&As) may be, particularly in terms of achieving fast revenue growth, they are not for the faint-hearted. 

The merger or acquisition process can take anywhere from a few months to a few years depending on such factors as whether the target company is a public or private entity, the negotiations, legislation, and the involvement of financial institutions and other stakeholders.

“The actual transaction can be done very quickly if you’ve identified your target and if all parties are keen to go ahead and legals can be put in place,” says Connon. 

“But typically, a merger or an acquisition takes several months.”

But you also need to factor in the time that will be involved in the identification of suitable target companies as well as the post-acquisition integration.

The post-acquisition integration can take anywhere from six to 12 months, she explains. 

“So the actual transaction itself can be done very, very quickly. It’s the process of identifying the target and making sure it’s something that will work for your organisation as a combined entity and making it happen after you’ve done the deal.”

It’s estimated that of all M&As, 70% to 90% fail for various reasons. 

Many failures are due to a lack of strategic planning and incomplete due diligence, according to Connon. 

They also fail if there is a poor strategic fit between the two companies, a poorly managed integration or an overly optimistic projection of the target company.

The result is a failed growth strategy and a large amount of lost opportunities.

Successful merger or acquisition strategy

So, how can you be sure of being in the 10% to 30% who achieve successful acquisitions or mergers?

Before even starting your search for target companies, it’s essential that you clarify your acquisition strategy and reason for merging with or acquiring a company, says Connon.

Most successful acquisitions happen when companies have identified and understood their own acquisition strategy, says Connon. 

They have clarified the company’s direction over the next two to five years, understand the market challenges for their core business, and know the gaps in their own portfolios and skillsets.

“They also take time to identify potential targets and to subtly review and understand the strengths and weaknesses of each of those target companies,” she adds. 

“Post-acquisition, the ones that tend to fail are the ones where acquiring companies haven’t taken the time to really understand their own strategy or market challenges and what they want from an acquisition. Often, it’s been done for emotional reasons rather than good, sound business reasons. Those companies will typically fail.”

To develop your acquisition strategy, you’ll need to be clear about what you hope to achieve. What is your business model? What do you want to do? Do you want to grow income, to improve profitability, to enhance cash flow? Where are the market challenges in your sector and can you address them all? If you can’t, do you need to make an acquisition? Do you need to merge?

If you conclude that a merger or acquisition is desirable and will be beneficial in the long-term, then you need to develop an “identikit” of what that potential company looks like, she says. 

Every company you consider should be evaluated against the metrics you’ve decided upon.

“Don’t get distracted by personal judgement. If you stick to the metrics you’re looking for, you’re more likely to make a successful acquisition,” she adds.

Due diligence

You and your team of M&A experts need to carry out due diligence and investigate the target company’s business, people (particularly crucial personnel), records and key documents. 

The point of the due diligence process is to uncover any inherent risks in the target business, to question the value placed on the investment or acquisition price and to identify critical issues.

Your M&A team should ask questions and request documentation about the following areas:

•         Corporate information, including the company structure, shareholders or option holders and directors

•         Business and assets, including your business plan, assets and contracts with both customers and suppliers

•         Finance including details of all company borrowings and loan agreements, cash flow statement, business reports, plus all tax liabilities and VAT returns

•         Human Resources including details of contracts for directors and employees

•         IP and IT, including information about IPs, owned or used by the target company and the software and equipment that are used

•         Pension plans that are in place for directors and employees

•         Litigation including details of any disputes or legal proceedings the company is involved with now or in the future along with licenses or regulatory agreements it has

•         Property including information of real estate that’s owned or leased by the target business

•         Insurance policy details along with recent or future claims

•         Health and safety policies that are in place

•         Data protection, including information about how sensitive data is stored and protected and reassurance the target company is compliant with data protection laws

Post-acquisition or merger, you should use your original strategy to measure its success, whether that’s income growth of 25% or improved profits of 2%.

“That would be the target by which you’d measure your combined entity. You’d go back to those numbers and see what have you’ve achieved compared with what you set out to achieve.”

tel: (800) 919-4022
email: [email protected]
www.thecfocenter.com

 

 

Future Proof Your Business

1 
2 
  • Tell us what you need

    Select as many as you require...

strategic planning

Warning: Without Exit Planning, You Could Be Left With Nothing

Do you dream of selling your business for a very handsome profit so you can retire and spend your days on luxury cruises or working on your golf handicap?

Well, without an exit plan, your dream may be just that, a dream that never comes to fruition.

Sell at the wrong time or without thinking about the impact of taxation, for example, and you really could be left with nothing to show for your years of hard work.

Every tax adviser that we meet agrees that without appropriate planning, business owners could pay far more tax than necessary when exiting the company. With the correct planning of your exit, at least one year ahead, preferably far sooner, you can minimize, or sometimes even eliminate both capital gains and income tax.

You may also need to consider your partners, directors and managers as incentivising them with shares or options may be a way of aligning them with your goals on the sale of your business.

That said, it’s important to realize that selling the company is not your only exit option. You can also:

  • Transfer ownership to your children
  • Sell to management
  • Take your company public by listing on the stock market
  • Liquidate the assets and take the cash that is realized

Even if your dream is to pass the company on to the next generation of your family, you still need to plan how to maximize the value of the business so they inherit something worthwhile rather than burdensome. Otherwise, you’ll be lumbering them with something closer to a millstone than a prize worth having.

The same principle applies to liquidating or publicly launching the company. Your plan should be to maximize its value and therefore maximize your options for an exit.

An exit plan allows you as the owner to remain in control of the sale (or succession) process and focus the business on the most critical value-enhancing strategies before your exit.

You might think you’re too busy right now to create an exit strategy but time really is of the essence if you want to get the business in shape to exit.

You’ll need time to develop unique sustainable selling points so you can show prospective owners that the business will enjoy continued growth, you are selling the future, not the past.

When you talk about the company’s medium and long-term prospects to potential buyers, being able to demonstrate that you’ve already made inroads into new geographical markets or new product ranges or services will help strengthen your case. That will take time which again is why you need to develop your exit strategy sooner rather than later.

Equally important is to consider the possible threats to your business which could have an impact on the attractiveness and therefore value of your business. Such threats might include an adverse change in legislation or new and competing technology in your existing markets. You and your management team need to develop a strategy to defend the business against such threats where possible and that again will take time to design and implement.

Your potential buyers will expect at least two years’ of accurate information including monthly management accounts, margin analysis and tax position before they make any sort of offer. They should then conduct extensive due diligence into all aspects of the business in order to identify potential liabilities, risks and management expertise.

Fortunately, you don’t have to do this alone. In fact, it could be an expensive false economy to undertake any of this without first consulting exit planning experts. They can help you to:

  • Explore the exit strategies that will best serve your goals for the business and yourself
  • Evaluate the business’ current value and its key value drivers
  • Compare the business’ current value with the desired sale value (for individual owners this will be the amount of capital you need to underpin your future lifestyle needs)
  • Understand the future prospects for the business
  • Identify who the business will appeal to and why
  • Identify what may make the business unappealing to potential buyers and so restrict or negatively affect exit value
  • Clarify what you and your management team need to do in the short and medium term to improve the key value drivers and minimize the unappealing aspects to potential trade buyers, institutional investors or the existing management team

If you would like to read our exit planning which explains the entire exit planning process and the considerations required of an SMB leading up to and during an exit you can do so by clicking here.

If you plan to sell, your team of advisors will also help you find the right buyer, ensure the buyer has the right finance in place to pay for the transaction, optimize your net of tax cash receipt after the sale and help you to plan your new post-sale life.

Planning a profitable exit doesn’t have to cost a fortune and nor does it have to take you away from running your business day to day. A part-time CFO or FD can help with exit planning strategies and advise you on the most suitable route forward. It’s what one of our part-time CFOs did for the original owners of Kiddicare, enabling them to sell to the supermarket giant Morrisons in the UK for £70 million (at a remarkable 20x profit multiple).

With the right exit planning, you too can realize some significant personal goals, create a retirement nest egg for you and your family and secure your future. But for that to happen, you need to take action today.

To find out how you can take on one of the country’s top CFO’s, but on a part-time basis, to help get your business into shape in advance of a potential exit you can watch our 3 minute video which explains the CFO Center service.

 

fd-heart

Book in for a free financial health check

Book Now
fd-stars

Rate your company finance function in nine minutes

Take The F Score
fd-speech

Do you have a burning finance question? Ask one of the country’s top CFOs now

Ask The CFO
fd-money

Book yourself in for a complimentary 30 minute finance breakthrough session

Book Now
Call Now Button