Expanding your business through acquisition

Expanding through acquisition is a make-or-break decision for any business. A successful takeover will boost morale and profits. But if you pick the wrong target, pay too much or fail to integrate the acquisition your business may never recover.

Why make an acquisition?

An acquisition should be a well-thought out move and a key plank in your long-term strategy. The Institute of Directors recommends carrying out a SWOT analysis by jotting down your: Strengths, Weaknesses, Opportunities and Threats. This should help you to decide whether buying another business is a good idea or whether you should look at alternatives.

The analysis might, for example, identify seasonality as your weakness. So if your sales are geared towards the summer months you could look for a business that performs well in the winter months.

The right acquisition can help with:

• a static or shrinking market;
• a reliance on one key employee or customer;
• the arrival of a new and aggressive rival;
• a product that is coming to the end of its lifespan.

An acquisition can bring you sales in different parts of the country or abroad without the cost of starting from scratch. You may be able to cross-sell products to each other’s customers and launching new products is less risky with a broad customer base.

The combined business should have more clout in negotiations with your bank or supplier. Buying in bulk and economies of scale - even if you’re in different industries - will also cut costs. You may be able to run finance, administration and human resources from one office and make savings in distribution, sales and marketing. If the two businesses are in the same industry you might save on the cost of manufacturing.

Perhaps your target has something you can’t find elsewhere: a licence to use a brand, a property in an area where you’ve been refused planning permission, or a particular knowledge base. But buying a business is time-consuming and disruptive. Make sure the combined business is worth the effort.

Where do you look?

Browse the classified section of newspapers such as The Financial Times, The Times and the Sunday Times. Magazines like Dalton’s Weekly, Exchange and Mart and Loot also offer businesses for sale. Or check out Businesses for Sale.

Trade magazines are a good source and if you have a particular part of the country in mind scan its local newspapers, or place your own advertisement. Keep your ears open for tip-offs at business conferences and exhibitions, trade associations or business clubs.

Some of the bigger accountancy firms offer help in finding acquisitions and business transfer agents, who are similar to estate agents, can be useful. Make sure they are a member of the National Association of Estate Agents.

Do your homework

You usually have a period of about three to four weeks when the target lets you look at its books. This “due diligence” is your chance to check facts and to get the price right. It is also an opportunity to weigh up the business’s problems and what it will take to sort them out.

Accountants and solicitors will help you assess the facts and figures. They should pay particular attention to:

• employment terms and conditions, including pensions and profit sharing;
• ongoing litigation;
• major contracts and orders;
• IT systems and technology;
• environmental issues;
• intellectual property such as patents.

Integration

Any period of uncertainty is bad for staff morale and productivity. Let your new employees know as soon as possible what’s happening and tell them of any changes that might affect them.

If a business is sold as a going concern staff automatically start working for the new owner under the same terms and conditions. Consult a solicitor before making redundancies to avoid the risk of industrial tribunals.

You don’t need to continue with the same rights and obligations relating to occupational pension schemes but if you don’t offer something comparable you might face a claim for unfair dismissal.

Remember that an acquisition is only one option and be prepared to walk away from it if you have doubts. You may have invested money and time in researching a target but buying the wrong business can be fatal.

Useful links

Businesses for Sale www.businessesforsale.com/tiscali/

Institute of Directors www.iod.co.uk