2 October 2012
Press ReleasesGeneral business wisdom suggests that the majority of business acquisitions are not successful and fail to deliver to expectations. Whilst clearly any such statement depends on whether the original expectations were realistic or not this is a statement that does not ring true in our experience. At JCCF the majority of the acquisitions we advise on are successful.
May be it's luck or as Sam Goldwyn said “ the harder I work the luckier I get”, so more likely it's because we work hard on our acquisition advice. Certainly we have developed a rigorous acquisition process which, through attention to detail at every stage, delivers successful acquisitions to our clients. Equally our experience of selling businesses does suggest that other buyers of businesses do not always approach acquisitions in the same way and leave too much to chance with inadequate planning and poor execution.
The purpose of this article is to introduce you to the acquisition process. Subsequent articles, to be published over during autumn 2012, will provide more detail on each stage. However the best way to see how it works in practice is to attend one of our interactive workshops which will allow you to consider the process in the context of your business. You can also download our booklet - Making Acquisitions Successful and/or the podcasts from our website. Alternatively contact us to organise a meeting with one of our team to discuss in more personal detail.
Set out below is the essential 6 stage acquisition process required for successful acquisitions.
Step 1 - SETTING THE STRATEGY
Why is the acquisition route better or at least as good as organic growth? Would it allow you to save significant costs or is there an opportunity to acquire complimentary technology that it would cost too much to build?
As stated above acquisitions are risky, you really do need to ensure that the risk reward balance is right before proceeding. And then stick to the strategy.
Of course all businesses must retain the ability to act if unexpected opportunities arise but in such circumstances the risk of a poor acquisition are clearly much higher. Some initial strategic thinking should ensure that even opportunistic acquisitions fit within pre-laid plans and raise the likelihood of successful execution and post acquisition integration. As with many business processes the start point sets the key foundation stone without it everything is down to luck.
Step 2 - IDENTIFY THE TARGETS
The output from Step 1 will ensure that you set appropriate criteria for the acquisition(s) based on the strategic objectives identified. The criteria allow you to easily identify the right targets and prioritise the targets. Once this is done whether you follow an active or passive search from there is less important. Do not, however, compromise the planning in Step 1 by accepting a business that does not meet all the criteria. Doing so spells disaster. Far too often we see management teams compromise the previously agreed criteria to allow an acquisition to move ahead becuase it is available only to regret it later.
Step 3 - MAKING THE APPROACH
There are many options and alternatives to execute this stage. These will be explored in more detail in later articles but the key point is get on with it!! Once the targets are identified make the move in what ever way you feel appropriate at that time. Too much analysis is paralysis. However much analysis you do the answer from the target may still be no, or the target may be just about to agree a deal with another acquirer.
Step 4 - GATHERING INFORMATION
There is a chicken and egg situation at this point. How can you put a value on the target until you have adequate information to properly assess the potential value. Equally, why should a business reveal confidential information to you until they have comfort the value meets their expectations?
Inevitably a compromise must be struck with both sides being commercial. It does of course help if the strategy and acquisition setting stages of the process have been completed properly. If these stages have been done then it will be easy to identify the key information required to value the business. By asking for a precise focused package of information and a valuation methodology that you will apply to the business the vendors will gain confidence you are a serious acquirer and be prepared to disclose information albeit under a confidentiality or non-disclosure agreement.
Step 5 - MAKING AN OFFER
Is it verbal or written? Is it a precise number or range? Is it brief or is it detailed? Do you start with a high valuation and work down or do you go in with a low valuation and be prepared to be worked up?
In truth there is no one right answer, the right approach will depend on the circumstances. In particular, the right approach will depend on the relationship with the vendor and/or his or her advisers. What is always right is to be positive and create confidence that you will deliver the deal set out within the given timescale and within a sensible process. Show that you have the funds available to complete the transaction and make it clear which are the key assumptions on which the valuation is based. I would say it wouldn't I, but it does help if the offer is set out by your advisers - it will give the target confidence that you are serious and have the resource to complete the deal exepeditiously.
Step 6 - COMPLETING THE DEAL
Only three words to describe the most complex step of the process. In reality there is:
Due Diligence - commercial, customer references, management, legal, financial, tax, environmental, IPR, insurance, etc, etc.
Funding - raising bank or equity finance
Financial modelling of combined businesses
Tax structure of the acquisition structure
SPV, Newco or existing corporate vehicle
Legal documentation - purchase agreement, shareholders agreement, bank facility agreement, loan notes, disclosure letter, tax indemnity, service agreements, completion accounts, working capital adjustments, tax clearances.
Post acquisition integration plan - who does what when?
Alongside all the above is the need to: maintain the relationship with the vendors and financiers, build relationships with key management and staff in the target and, most crucially, make sure your own business continues to trade strongly.
This is where advisers really earn their fee. Good advisers take the train from their client by driving the process, having solutions to problems that arise and anticipating hitches before they become problems.
Each step will be covered in more detail in further articles over the coming weeks. However a much better understanding of the James Cowper Kreston process to ensure your acquisition is successful will be gained by attending the interactive workshop or meeting one of the James Cowper Kreston team members.
