Expansion through acquisition - Coombes Corporate Finance

Expansion through acquisition


Acquisitions! One may ask how relevant this is with the doom and gloom of the “credit crises”, however a recently published survey carried out on privately owned business shows that over 70% of participants forecasted growth in their business over the next 12 months.  This growth will be delivered through organic growth and through acquisitions and it is the latter this article will address.

The key place to start is to identify the type of company you wish to target and so you need to set out target selection criteria, addressing questions such as:

What sector are you targeting – are you looking for expansion of own business sector or diversifying into a new sector?

  • Do you want to expand your existing market or do you want to move up or down the supply chain?
  • Do you want to expand into a new geographical area?  In recent years, many Irish companies have acquired in the UK and in Central/Eastern Europe.
  • What size of company should you target?

These are important questions to answer and in doing so you need to ensure that any selection ties back to your overall business strategy/vision and that any potential acquisition enhances the value of your existing business.

Once the criteria are established, then you need to research based on these criteria using a combination of your own knowledge and desk top research.  The power of the internet and search engines comes to the fore here, with financial and non financial information being readily available.  From this research you should be able to shortlist some key targets.

When completing this research, you need to look at the “culture” of any target business to ensure that it matches your business culture and by culture I refer to service culture, attitude towards customers, attitude toward staff, etc.  These are very important and often overlooked but if there is a mismatch of culture, then the post acquisition integration will become very difficult and may jeopardise the success of the transaction.

Once the target(s) have been identified, you then approach the owners and establish if they are interested in a transaction. I would advise to use an external advisor for this process so that initially you distance yourself from the approach.  Such enquiries are usually made on a no names basis and only when a level of interest is established that your name is released.  However once interest is established, it is then important that you get to meet the vendors at an early stage, to establish the fit of the target company to yours, again not forgetting the culture elements mentioned above.

Then the negotiations will start, establishing what type of deal can be done.  I would advise you to remain flexible and open to ideas during this part of the process.  In my experience, an owner manager selling his/her business is interested in the financial value, but often fringe non financial issues are as important if not more important than money – items such as looking after their staff, the company name which may by the family name, supporting local charities, etc. Therefore, it is important to establish value expectations at an early stage, but it is also important to listen to the vendor and establish the important fringe items that may help you clinch the deal.

Once a deal is agreed in principal, write it down in the form of a Heads of Agreement (“HOA”) detailing key terms.  These HOA will be non binding on both parties with the exception of giving you exclusivity to complete the deal and the negotiations should remain confidential.

You then need to complete your legal, financial and other types of due diligence.  These should be completed by suitably qualified professionals, remembering that due diligence is done to protect your investment and identify any potential issues that may arise post acquisition.  During this time you should also be identifying the source(s) of funding to complete the transaction.  Despite the recent credit crises, banks remain open for business and they will fund good sound proposals, and so it is important to present the opportunity professionally identifying the benefits of the acquisition such as synergies, etc.

If you are happy with the due diligence, then a Share Purchase agreement needs to be drafted by your legal team and agreed with the vendor.  This will include the agreed terms and various warranties that are designed to protect you and your investment.

On closing the acquisition, there is often cause for celebrating and it is important to celebrate the event, both for you and the vendor. However, soon realism sets in that the real work now begins in integrating and making a success of the acquisition.  It is wise that during the due diligence phase that you plan this integration, identifying funding requirement, business process integration, cultural differences, staff remuneration differences, etc.  If this is done at due diligence stage, then post acquisition integration will be easier and more successful.

 Contact: fcoombes@coombesfinance.com