Before you start looking for a company to buy, you must ask yourself if you really need to make an acquisition. "Is your business in good shape? Will your current pace of development meet your shareholders' aspirations? Only a negative answer to one or both of those questions may mean it is time to think about acquiring another firm," explains Paul Arora, managing director of Arocon Corporate Finance (www.arocon.co.uk).
Once you have decided to take the leap, the first step to achieving a good return on investment (ROI) is preparation. This starts by clearly defining your objectives, such as what type of synergies you are looking for and therefore what criteria the target firm must meet. You will then need to conduct a proactive and targeted search, because most eligible firms will likely not be for sale.
"This is where a good corporate finance adviser can help, as they have the tools to conduct the research for you and can give you a list of firms matching your parameters in your jurisdiction of choice," says Arora. "In addition, because they're independent, it's easier for them to make the initial contact while you remain anonymous until the target firm starts showing an interest."
Once you have established your goals and transactional rationale - not forgetting the likely costs of the deal - you should review your own financials to ensure you can obtain the necessary funding. If you are listed, you can probably finance your acquisition through a share issue, though to raise the amount required, you will need to convince your investors to back you.
A private company should first look at internal sources of financing (see our series of articles on internal funding, part two and part three), then complement those with debt or external investment. "I would recommend keeping debt to a minimum," advises Arora. "If you over-leverage, it will probably be your lender who will be determining the value of the acquisition, not you."
'SOUND STRATEGY' IS KEY
Once you have identified your target and sources of funding - but before making an offer - you need to collect as much information as you can about the company: its past, present and forecast financials, management skills, strategic revenue drivers, company culture, suppliers and customers, etc. This should confirm that your strategy can be implemented and help you identify post-integration synergies such as cost savings and cross-selling opportunities.
"The key to a successful acquisition is to have a sound strategy, and to undertake thorough commercial, legal, financial and technological due diligence," recaps Arora. "Are all their products or services profitable? Will you need to change or close any part of their operations? How will you achieve synergies to increase shareholder value? Throughout the whole process, a good corporate finance adviser should question your strategy from an independent perspective to ensure it is sound and can meet your goals."
MORE POINTERS
Arora lists a few other crucial points to bear in mind: "Don't underestimate the amount of work and time involved for your management team. Don't let emotions lead, particularly if you are acquiring a firm directly from an entrepreneurial founder, because he or she will most likely have strong feelings on many issues such as retention of the company name and viewing the workforce as family and wanting to ensure their ongoing employment."
He adds that it is also a good strategy to reduce one's risk by retaining the target's founder as part of the team for a period post completion and to pay part of the transaction price over a period of time based on pre-agreed milestones.
"Finally, agree on a clear message for both sets of employees - it's crucial to communicate positively and immediately upon acquisition, underlining the greater value that is being built, mentioning the enhanced career prospects and, importantly, reassuring staff about job cuts wherever possible."
To then convert the deal into long-term success and maximize ROI, make sure you follow through on your strategies to make those synergies happen. "You will get busy, so don't let it fall away," concludes Arora. "You need those synergies to materialize if you want to create added value for your firm and your shareholders. Always bear in mind that the over-riding objective is to make two plus two greater than four."
Zawya BusinessPulse 2014
