Acquisition and mergers

Many businesses reach the stage where they’re in danger of plateauing and have organically outgrown their former ‘start-up’ status. It could be down to a lack of innovation (or motivation), a slump in growth, the impact of fierce competition, or perhaps a change in market trends. It could also be that the market is saturated with the same types of products, among a number of other factors.

So what do you do when you’ve reached a business plateau and hit a brick wall when it comes to productivity, innovation or market saturation?

Let’s look at some of the key issues to address if your business productivity has slumped or you’ve reached the point where you’re ready to take on something (or someone!) new:-

• What is your product(s) and does it need to be modified?
• Where does your product sit in terms of pricing compared with your competitors?
• Does your product require a re-design or perhaps another addition to its range?
• What (if any) are the issues holding your production line back?
• What is your technology and is it still fit for purpose?
• Have you outgrown your business premises or perhaps ran out of warehouse space?
• What (if anything) is impacting on your logistics department?
• Who are the disruptors and innovators that are affecting your business?
• What is your company’s vision?
• How are you performing in terms of your overall business strategy?
• How strong is your management team?
• How buoyant is your balance sheet and cash flow?

If, after answering those questions, you’ve decided that your business is in pretty good shape - you’re at a level where you feel confident with the skills and leadership in your management team and you’ve a healthy balance sheet - you may have simply reached the point where you’re ready to take your business to the next level. So read on to understand the options available to you.

You’ve a number of options if you’re considering expanding your business and those options principally relate to your ability to secure investment, as well as how strong your balance sheet is. Many a business change requires some sort of cash injection or other and it’s no different when it comes to business growth; however you choose to grow.

You can continue to grow your business by:

• Expanding through an additional product or service
  
• Acquiring of one of your smaller competitors whose product group is compatible with yours, or
• Consider a merger with one of your key business rivals, assuming you can find a way to merge the interests of both companies

Be aware that whatever you do, you'll have to source the funds to execute your plans.

Running a successful business will have you constantly on your toes. No matter how well you’re doing there’ll always be some overnight competitor that creeps up out of nowhere, ready to steal your thunder. Or perhaps they haven’t and it’s you that hasn’t been paying sufficient enough attention to what’s been happening in the market around you?

If you’re considering reinventing the wheel, try to focus on what your competitors have that you don’t. Do some research into what works for them and why. What are the high level benefits that are clearly driving consumer demand - in their favour? Engage with your customers to understand more about their buying behaviours and carry out some research that'll give you a glimpse into the psychology of why they buy both yours and other similar products. Customer insight can be a really powerful tool, so if they're willing to talk, be willing to listen.

Look at your management structure: Think about who stays and who goes and whether you need to make any changes. Think about how you can potentially expand in terms of space and logistics. Also consider how you’ll cope with the resources you have and what resources you’ll need to be able to grow.

It may be that your production line can easily facilitate the demand of another product, but the limited capacity of your warehouse simply can’t. So give some thought to the cost of a potential upheaval if you think you might need to move location and consider whether the up-root is worth the costs involved.

Be vigilant over what might happen if you do absolutely nothing and are apathetic to change management and to growing your business. Doing nothing can be dangerous, so don’t let indifference get the better of you.

Making a high level decision as growing a business is not for the fainthearted. You’ll need to be ruthless and look at the bigger picture, taking a holistic view as you make plans to create something bigger, better and stronger than before.

There's much rationale behind why one business might acquire another.
It could be to:

• Expand its product range
• Boost its income streams
• Increase its international presence
• Enhance its brand awareness
• Further its trade
• Reduce its costs

Acquiring a business can be a costly affair, but getting a readymade business in exchange for a cash sum (however sizable that may be) can sometimes be one of the easiest options to take. There are real merits in considering business acquisition from a cost perspective, as well as the added value of enhanced market visibility, additional revenue streams and a cemented foothold in the marketplace you're currently in, or a new market entirely.

The question is: do you look at acquiring an underperforming company that’s struggling in terms of its working capital, or grab an up and coming business before the cost of acquisition spirals out of control? Or stick to your guns and expand your business through an internal restructure?

Answer: That all depends on the costs involved and how liquid you are.

Whether you have money or not, the world will still turn - with or without you! 

You’ll need to act with extreme diligence if you’re going to acquire a going concern. You'll have a duty to understand what you’re buying and on what terms.

At the very least you’ll need to investigate:

• Where the company’s products and services sit in terms of Intellectual Property?
• What technological licences the company has?
• If there’s any involvement from a third party?
• If the company’s financial statements merit the acquisition?
• What their EBITDA is?*
• What costs are involved in the acquisition?
• Who are the company’s material contracts with?
• Will the acquisition generate additional sales and revenue streams and on what scale?
• What job losses or personnel changes will occur and will these provoke trade union actions?
• Will there be any litigation issues from both a business and personnel perspective?
• What is the international scope of the business you’re acquiring?
• How will the acquisition help your marketshare?
• How can you evidence the strategic fit from a tangible perspective?
• What is the incremental value in going ahead with the acquisition?

There’s an awful lot of work involved in making a successful acquisition and many acquisitions fall flat at the final hurdle. Having a defined strategy in place and key determined criteria you’re looking for before you search for a target will help you immensely.

Whether you manage an acquisition in-house or outsource the task to a specialist acquisition firm, stay close to the negotiations and only agree a price you know you can definitely afford. Understand the financial limits (and the repercussions of exceeding your budget) and be rigorous when it comes to working within the parameters agreed by either your management team or your financial or business adviser(s).

If you are successful and manage to see your acquisition through to completion, the integration process certainly won’t be achieved overnight. On paper, synergy can often look easier than implementing it in practical terms and in a real-life business situation.

Having said that, if you’ve acted with all the necessary diligence (and despite the short term entanglement!), once things have settled down you might well find yourself in a revolutionary position where your market foothold has increased in ways you never thought were possible.

*Just so you know, EBITDA stands for earnings before tax, income, depreciation and amortisation. For more information, click here.

Mergers aren’t particularly common, but they have been known to happen. From pharmaceutical companies to UK high street chains, business mergers have begun to establish a track record, with many reporting record profits and others reporting more volatile trading figures.

There are many reasons why one business might merge with another and you’ll start to see a similar pattern if you compare these with the rationale under Acquisition. They're very similar.

Here's why a business merger may take place:

• Deepen market penetration
• Improve productivity and performance
• Reduce impact of competitors
• Reduce operating costs by combining operations
• Avail of technological advancements
• Unite forces to strength brand and foothold
• Enter into new markets
• Benefit from diverse product development
• Seek international growth

There are two types of mergers and these are noted below:

Agreed merger: this is where two companies want to merge and the merger is planned and amicable.

Hostile merger: this is where one company seeks to control another, without its permission, by either making a bid for it or purchasing a majority shareholding on the open stock market to gain control.

Mergers are extremely similar to business acquisitions in that the rationale follows a similar, prevalent theme of: expansion, diversification, power and longevity.

If you feel there’s real value in your business (and business model) and you can evidence a valuation that genuinely reflects the value of your company, as well as a clear strategy, strong management team and a sound succession plan, you might be in a position to consider discussing a merger with someone whose business’ vision matches yours.

The usual due diligence rules apply if you’re considering going down the route of a business merger, so refer back to the section on Expansion Plans: what are the options? – to refresh your memory and understand both the personnel and financial ramifications.

Remember! There are huge implications in this sort of business undertaking, so try to consider the impact on your current staff and the volume of job losses (plus the cost of those) that may be imminent. Also be mindful that while this whole process is ongoing the change may deliver a fear of the unknown, so be empathetic and understand that your workforce is likely to feel threatened and unsettled.

You might find yourself dispelling a series of rumours or having to address ongoing employee concerns, but building these frontline issues into your merger plans will help you cope and, more importantly, communicate what’s going on to the people that matter the most.

In terms of timescales, it can take a considerable length of time to complete on a merger. Discussions will often kick start with a series of closed-door conversations before any real conditions of the merger are addressed in granular detail.

Where the companies involved are answerable to shareholders, recognise that shareholder voting rights apply too and that depending on the size and sale of the parties involved there may also be some government intervention; although this usually only applies to larger, corporate-type organisations.

In short, the time that elapses between the closed-door discussions, to signing on the dotted line can stretch from months right through to years.

But some things in life just can’t be rushed. And it if takes your business to the next level, it'll be worth it in the end.