According to ONS statistics, in 2019 UK companies were involved in 1,781 acquisitions or mergers worth in excess of £1m (the threshold at which ONS records the activity). It’s a well-established route to growth for businesses. It can be a much better option than organic growth, especially in fast-changing sectors such as tech and security. The key is to have a clear strategy and to make sure it’s part of your ongoing business planning.
Why is your company buying a business?
Are you looking to increase your reach internationally, or extend your capabilities? Is it about market share or synergy, increasing the value you can offer your customers? Is there a shortage of experience and skills in your sector? Maybe your focus is on scaling-up to support a future exit?
Buying a business should be part of your planning
The sooner you make acquisition part of your planning process, the better positioned you’ll be to either pursue specific targets or respond opportunistically. You and your team should understand why you’re looking acquire another company.
Whichever strategy you’re pursuing, you’ll need to have clarity on what you’re looking for so that you can evaluate options. You will need to have your criteria and parameters well defined in your business plan. This will help to make your search effective and avoid wasting time looking at companies that don’t fit your requirements. It will also help to operate your existing business, and manage your team, in a way that supports your acquisition strategy.
What should your criteria be?
Firstly, establish what you are looking for. We often help clients do this. Business owners often find that an external perspective helps to gain clarity and even uncover opportunities that they might not have considered.
What funding is available for an acquisition? Can the business fund the purchase out of cash flow or cash reserves? Will you need finance? Are you looking to use shares in your own company?
You’ll likely need some support to investigate these options. It’s essential to have clarity around what you can afford and how you will structure and fund the transaction. If you have that it means you can focus your search on the right size, scale and type of companies. Of course, you may also want to take a realistic look at the market and establish a view on what companies might cost. That means that if you need external funding, you can start putting it in place well in advance of beginning an acquisition.
Other questions to consider include:
- What specific sectors or sub-sectors are you targeting?
- What is the competitive landscape? Is anyone else likely to be targeting the same companies?
- What turnover, size, growth and/or profitability are you looking for? What sort of valuations would your target companies expect to attract?
- Are there particular locations or international markets that it would be good for the target company to address?
- Are there specific assets – partnerships, accreditations, facilities, for example – that you’re looking for?
What is the process for buying a business?
Our advice would be that it’s never too early to start the process of buying a business. That doesn’t just mean the planning of the transaction. You should be thinking about how you’re going to run the process while your existing business continues to operate ‘business as usual’.
It’s also important to be thinking about the post-purchase period so that there’s a clear plan to minimise disruption and make the transition as smooth as possible. If you need the acquired business to continue to run as it has before, you must put some focus on thinking ‘win-win’ for its management team and employees. We find this helps keep people on-side and, in reality, you and your management team will need to establish and maintain a good working relationship.
Once you’ve identified target companies, the process is likely to involve the following stages:
- Initial approach and evaluation – is there a mutual desire to do a deal, is the outline valuation acceptable, and what is the financial picture of the business?
- Heads of Agreement – at this stage, we’re still not talking about legally-binding documents. However, the objective is to condense the key aspects of the transaction into a single document – payment terms, responsibilities, the period of confidentiality and a timetable for completion.
- Formal due diligence – it is likely at this stage that you will engage professionals to carry out a thorough analysis of the business’ accounts, operations, processes and practices.
- Final negotiations and Sale and Purchase Agreement – creating the formal transaction documents signals the final stages of the process. This documentation seeks to make agreed details legally binding.
- Payment and completion – your advisor will have helped to structure how you will pay for your new acquisition. Depending on the scale of the purchase and what has been agreed, it could involve an outright cash purchase. However, it could be more complicated with an exchange of shares, external finance or investment, or a combination of these. You might agree an earn-out period with milestones for the acquired business to meet in line with a business plan.
It’s only the beginning
It’s important to realise that reaching this stage is only the start of the process. A good advisor will have helped you focus on your post-purchase plan so that the acquired business can be integrated appropriately, continue to operate effectively and start to realise the synergies and benefits you’ve identified. It’s usually important to establish and maintain good relationships with the management team, employees and stakeholders during the process too.
It’s never too early to start planning for an acquisition. In fact, successfully buying a business and scaling your organisation’s growth depends on having a clear focus and a clear picture of what your objectives and business plan are.