Member Article

The Challenger: Buying into it

Should entrepreneurs hit the acquisition trail? Buying another business is often an attractive way to accelerate your company’s growth, but it’s essential to be well prepared and seize the right opportunity.

In my experience most acquisitions fall into one of two categories. Some businesses pursue roll-up strategies where they acquire other companies in their industry, either to achieve scale and increase their market share or to give them access to a new market, such as a different geography. Alternatively, a business may choose to make a transformational acquisition, disrupting a market or supply chain.

Both types of deal can help businesses to achieve their growth ambitions and create value for shareholders. However, in either case, entrepreneurs should ensure they are aware of the risks and how to evaluate them.

The work required to undertake an acquisition is significant and management teams should ensure this is not to the detriment of day-to-day operations. Inevitably it can also place a financial burden on a business and, especially in the case of more transformational acquisitions, it can be tempting to pay too much, either financially or operationally, in the hope of a dramatic strategic shift.

The simplest way to mitigate risk is to plan ahead. Make sure you have a very clear idea about the kind of business you want to buy – and what you would rule out. At Livingbridge our in-house growth acceleration team works closely with our investees pursuing an acquisition strategy to help them answer these questions and ensure that there is a clear strategic roadmap from the outset.

We would encourage you to think carefully about the necessary criteria of any potential acquisition; in addition to financial metrics these should also encompass other types of value you might be seeking – new talent, intellectual property, or a presence in a particular market or product category. It’s also important at this point to consider how you would fund a deal – do you have finance in place, or would you need to take on additional debt or equity? If the latter is the case, then rest assured that both equity and debt providers are currently competing hard to provide funding to the most attractive growing businesses.

Doing the ground work early on should help you to move more quickly and effectively when you identify an acquisition target. You’ll have a better idea about the value the target might add, including the value of intangibles such as people and technology, and therefore a better grasp of what might be a realistic price. It’ll also give you the confidence to walk away from an acquisition if you can’t agree terms that reflect your assessment: don’t forget that no deal is better than a bad deal.

Once an acquisition process is underway keep in mind that it should be as frictionless as possible so that it doesn’t cause unnecessary disruption either to your business or the target company. The most crucial issue to address is very often human capital: think hard about how to keep your best people on both sides well-informed and engaged so that you don’t risk losing key talent.

Finally, while your trusted advisers will provide valuable help throughout the acquisition process, the ultimate decision about whether to go ahead will remain yours. Be prepared to challenge yourself: the bottom line test for any deal is whether you can see how it will add real value to your business.

This was posted in Bdaily's Members' News section by Steve Cordiner .