Grow­ing your busi­ness through acquisition

In brief – Acqui­si­tion can accel­er­ate the growth of your business

One way to accel­er­ate the growth of your busi­ness dra­mat­i­cal­ly is to buy anoth­er busi­ness. This can help you gain a com­pet­i­tive advan­tage in your indus­try, expand the scale of your oper­a­tions and lead to a num­ber of poten­tial ben­e­fits. These include the growth of your client base, expan­sion into new mar­kets, reduced com­pe­ti­tion and decreased expens­es through economies of scale.

What makes a good acquisition?

To buy a busi­ness suc­cess­ful­ly, your exist­ing busi­ness needs to have a sol­id foun­da­tion. This means hav­ing the peo­ple, sys­tems and resources to be able to inte­grate your oper­a­tions effec­tive­ly and smooth­ly with anoth­er com­pa­ny. Be method­i­cal — cre­ate an inte­gra­tion strat­e­gy with real­is­tic expec­ta­tions and deadlines. 

Fund­ing the acquisition

How you fund buy­ing anoth­er com­pa­ny is an impor­tant deci­sion to be made at the out­set. There are four main meth­ods:
Debt fund­ing – bor­row­ing mon­ey from a bank to fund the acqui­si­tion
Equi­ty fund­ing – exist­ing or new share­hold­ers of your busi­ness con­tribute mon­ey to fund the acqui­si­tion
Cash-flow fund­ing – this is pos­si­ble if your busi­ness has cash reserves and is con­sid­er­ably larg­er than the busi­ness to be acquired
Merg­er – in effect, this means buy­ing a busi­ness by sell­ing part of your exist­ing busi­ness to the sell­er of the acquired business
The acqui­si­tion process can be bro­ken down into six steps.

Step 1. Iden­ti­fy the target

If you are look­ing to buy a busi­ness in your own indus­try, doubt­less you already know who your com­peti­tors are and which of them are attrac­tive acqui­si­tion tar­gets. Alter­na­tive­ly, you may con­sid­er buy­ing a busi­ness which is a sup­pli­er to your indus­try, allow­ing you to cut costs and/​or increase prof­it mar­gins. Anoth­er pos­si­bil­i­ty is to look at dis­tressed busi­ness­es sell­ing assets – IP, equip­ment, plant – which cre­ate syn­er­gies with your exist­ing business.

Step 2. Enter into a terms sheet/​heads of agreement

This is a sum­ma­ry of the main com­mer­cial terms agreed between the buy­er and the sell­er and should include a timetable for com­ple­tion. The terms sheet usu­al­ly remains sub­ject to con­tract and is non-bind­ing (except for any con­fi­den­tial­i­ty provisions).

Step 3. Enter into a con­fi­den­tial­i­ty agreement

If you are the sell­er of a busi­ness, it is pru­dent to ensure that any prospec­tive buy­er signs a con­fi­den­tial­i­ty agree­ment before you dis­close any con­fi­den­tial or com­mer­cial­ly sen­si­tive infor­ma­tion about your business. 

Step 4. Con­duct due diligence

It is vital to research the tar­get thor­ough­ly to analyse its com­mer­cial, finan­cial and legal position.

Step 5. Deter­mine the val­ue of the target

Don’t rely sole­ly on EBIT and rev­enue streams in per­form­ing a val­u­a­tion and don’t rely on your own skills to do the val­u­a­tion unless you are an accoun­tant. Con­sid­er these elements: 

  • Prof­it pro­jec­tions with ref­er­ence to key busi­ness contracts
  • Prof­it margin
  • Debt/​equity gearing
  • Cash flow
  • Bal­ance sheet
  • Indus­try com­par­isons and com­pet­i­tive advantages
  • Non-finan­cial fac­tors such as the man­age­ment team and pub­lic perception
Step 6. Nego­ti­ate the sale agreement

You need to deter­mine whether you are acquir­ing the assets or the shares of the tar­get. If you use a share sale agree­ment, you are acquir­ing all the assets and lia­bil­i­ties of the tar­get com­pa­ny. If you use an asset sale agree­ment, you are not oblig­ed to acquire all the assets or any of the liabilities.

Keep a cool head

The biggest dis­as­ters in busi­ness acqui­si­tion stem from fail­ure to do due dili­gence prop­er­ly. Some­times peo­ple can be so swept up in the romance of the deal, so keen to clinch it, that it clouds their rea­son. Just because you can read the con­tract your­self doesn’t nec­es­sar­i­ly mean that you tru­ly under­stand its nuances and implications.

We’ve seen peo­ple who have end­ed up sad­dled with the vendor’s tax lia­bil­i­ties and customer/​supplier lia­bil­i­ties because they didn’t under­stand what they were com­mit­ting to and failed to get pro­fes­sion­al advice. Your lawyer, accoun­tant and busi­ness advi­sor are the peo­ple who can save you from mak­ing a deci­sion with dire consequences.

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