Acquisition Strategies for SMEs

As the Government stops pumping liquidity into the UK economy leaving it to stand on its own two feet, many businesses will come under increasing financial pressure.  The pundits are expecting that the highest levels of failures are still to come.

Whilst some of these businesses have survived 2009, they have been hit so severely that they will limp into the period of recovery without being able to take advantage of the opportunities this will present.  Little do these businesses realise that they are now key targets for other SME businesses. Armed with stronger balance sheets, those businesses that took early action during 2009 are now equipped to prowl around the market looking for acquisitions.

And contrary to popular belief, there is funding out there for this activity - Government and banks alike are keen to support it. However there are 2 major factors that will need to be overcome:-

• Banks will be keen to support acquisitions that can demonstrate real added value for the acquirer and as a result will be able to show a credible repayment profile for the debts provided. From years of experience, it is clear that buyers with indicative funding in place will be much better placed to secure a good price. To achieve this, businesses wishing to look for acquisitions should get their banks to "buy into" the acquisition strategy before asking to fund the first acquisition;

 

• The flip side to this is that sellers are unlikely to get a good price for their businesses if the acquirer needs to show reasonable repayment terms. However sellers should consider the chances of their business making a success in the long term given the damage caused in 2008 and 2009. This is not an easy decision but one that will arise time and again this year.

To try and bridge the gap, it would be reasonable to expect more staged acquisitions taking place whereby acquirers will buy other businesses in 2 or 3 stages. This would allow the deals to be funded more easily by the acquirer and for the seller to have some upside in his ownership as a result of his or her management under the support and guidance of the acquirer. For that to work, there also has to be a good strategic fit for the buyer and the seller for this to work.

So, if you're an SME business looking to grow through acquisition, how do you know if you have the right strategy? Answering the questions below will provide you with a direction on what you're looking to achieve:

• What does the company want to achieve as a result of acquisitions - more complementary products, a new sales channel, a new geographic market - these are typically sound strategies for acquisition. Some strategies are perhaps less beneficial, eg. buying an order book or because the staff are good. Diversification is very risky especially when it is hard to see any synergistic benefits.
• How will the targets be identified and approached?
• How will the targets be valued?
• How will the acquisitions be structured in terms of ownership and funding? If applicable how will key conflicts between buyers funding issues and seller value expectations referred to above be resolved?
• Who will be the team of professionals to process and complete the transactions and what are the costs?
• How will the acquisition be integrated into the group so that the synergistic values can be extracted and realised to repay the funding for the acquisitions?
• How will the culture of the acquired business be aligned to the main business?

If a successful SME business can answer all of these questions, it has a clear acquisition strategy which it can present to funders and potential investors.

SMEs that start making acquisition without an experienced finance person on the senior management team frequently regret the acquisitions before they have been completed.  Having this experience available at the outset of the acquisition will ensure funding approval is given, the business pays the right price and the negotiation process is managed effectively for all parties ensuring the best outcome and eventual acquisition. Good advisers can fill some of the gaps but a senior finance person in the team is often the glue holding it all together.    

As the largest provider of part-time Finance Directors in the UK, the FD Centre can help businesses achieve their strategic objectives. To find out if your business could benefit from a FREE Financial Health Check and receive valuable advice for your business' financial planning, visit www.thefdcentre.co.uk.