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Mergers and Acquisitions - a buyers’ guide for SMEs

Written by: Phil Shipperlee

Article Overview: Taking a look at the things you must consider when buying a company, in particular; why you should considering buying, how you will fund the acquisition, the process to be used, and the issues to be considered once the deal is done.

Mergers and Acquisitions - a buyers’ guide for SMEs

In this, the second of three articles, I am going to look at the things you must consider when buying a company. We are going to look at four main areas; why you should considering buying, how you will fund the acquisition, the process to be used, and the issues to be considered once the deal is done.

Why buy?

There could be many answers to this question and in the space available I will deal with the most common. One category of buyer is the established company that wishes to “expand” its own business. Expansion could be triggered by a desire to accelerate growth in revenue or profit, or perhaps a wish to move into, for example; a new product or service line, a new market or a new geographic territory. The actual reason is not that important provided it passes the test of having come from a logical strategy which has been thought through to be clearly good for the business. This will take a lot of management time and effort and it will bring its own problems so, please ensure you are clear that an acquisition will do more for the business than an improvement in organic selling techniques.

There are some classic bad reasons to acquire. One is the idea that your company is performing badly and an acquisition will fix the problems. It could work, but it is more likely that whatever issues you have which are preventing your existing business from performing will still be there after the acquisition and may well be magnified or in some other way made worse. Another bad reason is to wipe out a competitor – it rarely works. There are others but I am sure you get the point – only do it if it is a good idea that will deliver enough value to your existing business to justify the hassle.

The second main category of buyer is an individual, or a commercial entity, that has money they wish to invest in acquiring a particular business. This is clearly a financially driven strategy and if it is you spending your own money just be certain that you will get the type of returns you need and that you have fully assessed the risks associated with the acquisition.

Funding the deal.

The two main options are to use cash or shares in your existing business. In the case of cash it could be free cash that your business has generated or that you may have as a result of selling an earlier business. A simple rule of thumb is to ensure that the acquisition will give you a better return on your money than other investment options. In considering the return, you need to balance risk and reward.

Another approach to cash is to raise money through some form of loan. You will need to provide collateral which will either be something that you already have (please NOT your home), such as the asset value of your existing business or the collateral could come in the form of shares in the business you acquire going to the lender. If you are going to raise money for what is known as a leveraged buy out, you need to be even more certain that you will get the required return and that you have done a thorough risk analysis.

By funding through shares in your existing company, known as “paper”, you are in effect saying to the target acquisition “take shares in my company in exchange for shares in your own”. So, your company will need to be quite healthy so that the seller will consider shares in your company to be a more attractive proposition than shares in their own.

The process to be used.

As space is short I will say just one thing on this; use a professional organisation that makes their living out of M&A. You might think this is like a butcher saying, eat more meat, as this is one of the things that I do to earn my living. However, in earlier lives I have bought and sold companies and the intermediaries who acted on my behalf were very well worth the fees that it cost me to employ them. A good intermediary will have a full process to manage all aspects of the deal, they will have all sorts of contacts and above all they have the skill and experience to get you a good deal. They will approach the negotiation without emotion and they will be able to say tough things to people that would be more difficult for you especially if those people are future colleagues following the completion of the deal. One other thing, a good intermediary will help you to “see sense” – to them this is a deal and they will not suffer your emotional ties to things that do not really matter – they will keep you focused and lighten the work load for you.

The final thing to consider under process is due diligence. This is the process of investigation and discovery that helps you to know in advance exactly what you are buying. Do not skimp on this and be prepared to walk away from a deal if unexpected skeletons appear during due diligence. Don’t get too emotionally tied to a particular acquisition – if it starts to smell, be prepared to walk away. On the positive side, due diligence provides you with the opportunity to collect information that will help you prepare for the all important process of integrating the new business with your existing business.

After the deal is done.

You have inked the deal. You have drunk the champagne and enjoyed the feeling of euphoria that comes from pulling off a deal. Now it is the next morning and you still have a job to do plus a new job of merging the new and existing business or, if you have bought in, of assuming the role of CEO in the acquired company, your company. The Champagne celebration may have marked the end of the acquisition process but it also marks the beginning of the next phase of your business life. At an early stage when you were deciding that you wanted to buy a business, you should also have created the plan to take over, merge and assimilate that new business as quickly as possible. It is scary how quickly the perceived value in an acquisition can turn to dust if you do not hit the ground running with the newly combined or acquired business. You will need to deal with issues relating to; staff, customers, suppliers, banks and many other interested parties. To help with this, you will have gained a good view of the business through the due diligence process and so you should have a detailed plan in place before the deal is finally done.

Summary

* A decision to acquire should not be a knee jerk reaction to a tactical matter. This could result in a huge waste of your time and worse still could do potentially long term damage to the business

* The essence of any deal is the word “fair”. There cannot be a deal without a willing seller and a willing buyer and if they are VERY willing to sell be suspicious. Equally do not be tempted to take unfair advantage of people who may soon be your new colleagues.

* If they are very keen to sell, be cautious and ask is this a distressed sale? You do not want to find that their distress becomes yours.

* Do not skimp on due diligence.

* For any deal to make sense you must apply the rule "1 + 1 must = more than 2".

* Make sure you have a good process and I recommend that you use a professional, not your bank or your accountant but an M&A specialist.

* Plan from the beginning of the process how you will integrate the acquisition once you have it.

* If you are thinking of a leveraged buyout please be very certain that you will generate enough profit to pay off the debt as and when required otherwise they might just take your whole business away from you.

* Don’t be scared – if you do it right it could be very beneficial – just plan and take care.


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