There are many times throughout a company’s journey where a business owner should consider an acquisition. However, acquisitions can be difficult and cumbersome. It pays to know exactly when you should be taking the risk.
If you're seeking a business acquisition, Nash Advisory can guide you in the right direction. Contact us today and discover how we can add value to your business.
In the below article, we have outlined below some circumstances where it is a good time to consider an acquisition.
1. When you have cash or access to cash
Unless you have the financial resource to acquire a company, there is no real point in undertaking a detailed search for acquisitions. Financial resources can be in the form of:
- Excess available cash
- Ability to draw debt through new or existing lines of credit
- Ability to ask existing shareholders to provide more equity
- New financial partners looking to invest in the company
Securing finance for an acquisition will also allow you to better focus on the ideal size of the company you want to acquire (in terms of enterprise value). Do not waste your time looking at companies that are too large.
2. When you have a strong management team
Undertaking the purchase of a company is a time-consuming process that requires a huge commitment of time from your team to properly review all components of a target company. A proper due diligence process should be comprehensive and not just focus on the financials of the company, but all facets of the business, including:
- IT and other systems
- Growth prospects
- Legal structures
- Company history
- Sales cycle
With most transactions, it will require the use of specialist advisors to help with the review. The use of experienced transaction advisors in running and managing an acquisition process will help reduce overall transaction risk.
Once you have reviewed the business in detail and decide to go ahead with the transaction, the focus of the management team then turns towards integration. This requires a team to really ‘get their hands dirty’ to integrate the two companies so that there is a unification of all systems, policies, processes and procedures.
A key focus during integration is ensuring all new employees from the acquired company are comfortable and properly inducted into the new culture of the firm. This could mean revisiting Health & Safety training, relocating offices, understanding new roles and job descriptions, and developing new reporting lines.
3. When there is no growth in the industry
If the industry or sector that the company operates in has little to no growth either due to regulation or the inherent structure of the market, then acquiring a competitor may be the only real way to grow.
Consolidation within an industry through acquisition is a very common strategy for many companies and if done well, can lead to huge value enhancement for shareholders. Acquiring a competitor will enable a company to enhance its top line. It will also reduce overall operating cost if the company is able to rationalise certain roles and strip out duplicated costs.
4. When you want to sure up your supply chain
If you are heavily reliant on a certain supplier to the point where your business success could fail on the back of that relationship, then acquiring that supplier could be an excellent option. Not only will this sure up your supply chain, but it could also enable you to better protect your position in the market if this company also supplies your competitors.
Acquiring a key supplier will also allow you to enhance your operating margins as it will remove the margin the supplier normally charges to your company for the goods or service provided. It may also further diversify your business and give you access to new customers.
For example, an education & training company might purchase a publishing company that makes the textbooks.
5. When you want to have access to end-users and customers
Depending on where you lie in the overall supply chain — either as wholesaler, manufacturer, or supplier — you may be trading away significant margin if you do not hold the valuable relationship with an end-user. If you are in this situation then you could acquire a company that does hold this end-user relationship either via retail outlets, online sales platforms or simply a well-known brand that you supply.
Buying a company that you supply or provide services to could also sure up your business model, particularly if that customer holds a significant proportion of your overall revenue. It would effectively eliminate the possibility of that customer using a competitor service or product. You could also expand your service or product offering in the market if that supplier company sells other services or product that you do not provide.
6. When you do not have many opportunities in the pipeline or are not able to win work
Your company may not be very good at winning new customers or contracts even though your product or service is far superior to others in the market.
This may be because the others in the market are better at marketing and selling their product than your company, or they may hold excellent relationships with key customers that are preventing you from even getting a meeting with new potential customers.
In this scenario, it might be worth considering acquiring a competitor, or another market participant, that does have a well-recognised brand in the market or one that has an excellent sales and marketing team able to sell your product. The company may not even be from the same industry, they could just be very good at selling and marketing products or services which means you can simply utilise their skills and experience to push your product or service.
7. When the market is in recession
Depending upon how your company is sitting, heading into a recession can offer up some excellent opportunities. Businesses that are normally profitable with no cash flow issues are suddenly cash strapped and in need of urgent working capital funding.
In this scenario, you could easily pick up a bargain that would not normally be available. The key thing to understand when buying a company in this market is that you need to know what the funding requirement is going to look like over the recession period. What are your costs over this period and when is it likely you will get paid? If you can have a firm view on this and the fundamentals of the business stack up, then you could pick up an excellent business for a relatively small outlay.