Acquisitions

There are two routes to expanding a business. The first is to grow the business ‘organically’ that is by finding new customers through advertising, marketing and other routes and building up the business gradually. However this can prove expensive (advertising, staff recruitment, etc) and the timescale may be protracted. The alternative is to acquire an existing business, providing not only additional customers, but a workforce, infrastructure and track record. An acquisition describes the process of one business buying another.

The majority of acquisitions are of competitors or related businesses, such as a customer or supplier. Obvious advantages are increased buying power of the combined business allowing it to negotiate better prices with suppliers based on greater volumes and cost savings resulting from eliminating duplicated overheads. For example can the combined business be run from a single head office or use one warehouse rather than two?

It is important to be clear from the outset on the reasons for the acquisition and not lose sight of the original objectives as the process extends. For example this may form part of a planned strategy or be a response to outside factors e.g. a competitor being marketed for sale or an opportunity to buy a business in financial difficulty.

In some industries potential acquisition targets may be obvious. At any given time there may be companies being marketed for sale which meet the desired criteria. However it is useful to research the market carefully, with a corporate finance advisor, as the most obvious targets may not necessarily be the best. Having identified one or more potential acquisition targets, the most effective way to make an approach to see if a target company would consider discussing the possibility of a sale is often via an advisor.

If a business is being marketed for sale then it is likely to have a pack of information ready for potential purchasers to review. If this is not the case the purchaser will need to provide a list of information (financial, commercial, assets, etc.) which it requires in order to obtain a full understanding of the target business and to meet with the current owner and possibly other key members of management.

Confidentiality is often a major concern for any company disclosing information to a potential purchaser, particularly when dealing with a competitor. Information about customers, pricing and suppliers can be commercially sensitive and so may not be disclosed until late in the process. The purchaser will usually be required to sign a confidentiality agreement to confirm that they will not use the information provided for any other reason than considering the possibility of acquiring the business.

At this stage the purchaser should be able to form a view on the value of the business and then (assuming they are still keen to proceed) put forward an offer, setting out any conditions and additional information requirements. The valuation of a profitable business is most commonly based on a multiple of its maintainable profits. That is its operating profit after adjusting for any items which are exceptional or non-recurring. For example above market rate salaries paid to outgoing directors. Typically a profitable private company would be valued at up to five times its maintainable profit. This is usually on the assumption that the business is cash and debt free i.e. any bank debt will be paid off prior to completion and any cash in the bank would be added to the price. If a business is loss making or breakeven then its value is usually based on the value of the assets being acquired.

It is important to work with an advisor to consider both the valuation and the structure of an offer. Is it proposed to acquire the limited company (including all liabilities) or just the business and assets? How will the price be paid? All in cash on completion or in stages, possibly linked to future performance? For example if a business is growing it may be appropriate to link some of the consideration to future sales or profit targets. This allows the seller to share the benefit resulting from work carried out prior to sale, but protects the buyer from the risk of sales or profits not actually being achieved. Other important issues to consider include how reliant the business is on the current owners and key staff. Is a handover period required from the current owner?