KEY POINTS:
In today's increasingly competitive business climate, traditional business growth is more difficult than ever.
Given the high cost of attracting new customers, and the slowing economy, business growth through acquisition makes sound commercial sense.
In addition, if your business is family-owned, the chances are that managerial roles within your company tend to favour family; acquiring another company could assist in staff retention by sending a positive signal that career options are available within your company structure.
All industries are consolidating, not only nationally but also on a global basis. Those companies that lead this consolidation through aggressive acquisitions can create a strong and enduring platform.
Mergers and acquisitions are happening not only among well-publicised companies such as telecommunications and public utilities, but also in fragmented, locally owned businesses such as logistics, manufacturing, wholesalers and retail.
As consolidations absorb smaller firms, their revenue will rise along with efficiencies through combined operations and volume buying.
Financial measures cannot be ignored. Ultimately, a dollar value is attached to an acquisition and financial projections are critical.
However, cost cannot be the only criterion, as management must not lose sight of the strategic, operating and people issues involved, such as: additional manpower resource, functional skill transfer, new management techniques, resource sharing, and the opportunity to build market share.
Buying companies can be an expensive and time-consuming process. A well-organised acquisition strategy can save a great deal of time and money, and a strategic plan will significantly increase a buyer's chance of a successful acquisition.
One of the principal benefits of having a strategy for acquisitions is to prevent disastrous imprudent decisions made on the spur of the moment when a company gets caught up in the imperative to buy something.
Given its relatively small economic base, New Zealand can prove a hard taskmaster to the "why don't you go ahead and buy" investor.
An engineering company that has purchased a fast food franchise, for example, has probably not made a strategic acquisition.
A lot of time and energy can be expended in chasing inappropriate targets. An important first step is to draw up a set of acquisition guidelines to provide a "Go, No-Go" point before management proceeds further.
In assessing the suitability of a company to acquire, management may consider only:
* Companies with ownership of profitable products or services.
* Companies that have an established track record and excellent growth prospects.
* Subsidiaries and divisions of larger entities whose industry and products coincide with the potential acquirer's strategic objectives.
Too often, companies embark on a strategic acquisition when they do not already have adequate financial resources to complete the proposed transaction.
Likewise, good strategic acquisitions have failed because there were not adequate managerial skills available even to support the acquirer's business - and none to support the proposed acquisition.
Strategic planning should identify those companies and industries in which an entry will reduce risk, increase market share, access new technologies, increase cash flow, reduce expenses and increase shareholder value.
While no one wants to overpay, it is far better to slightly overpay and acquire a star than to pay book value or less for a business that simply will never perform to buyer expectation. What matters in the long run is not so much the price paid but the inherent strengths of the business, its market position, growth potential and strategic fit with the buyer's business.
Remember that companies that are approached as sellers do have reasons for responding favourably to buyer interest.
It is a well-known fact that the majority of business owners do not have a succession plan. Business owners imagine that all will be well, as one day the family will take over the business, or failing that, an interested party will make that all-important initial phone call.
Business owners also have partners or family who wish to retire or to take up a new venture.
Other reasons for sellers to respond favorably to buyer interest are: lack of working capital, increased competition, looming new technologies, staffing issues, or lack of a suitable successor.
As a suggested first step in the acquisition process, make a phone call to the owner, identifying yourself by name, the name of your company and your title. Ask the owner to meet you for a discussion on a business proposition.
Finally, let him know that you will be the only person in attendance and that the discussions will be private, and suggest a suitable venue, perhaps a chat over a cup of coffee.
From that initial meeting a decision can be made by mutual consent to engage further or to disengage from the acquisition process.
Remember that not every business deal is made in heaven.
Some points to bear in mind:
* Don't spend time speculating on the seller's motives; you just want to be the short-listed potential buyer.
* Remember that sellers will be concerned for the future of their business and how they and their staff will be treated after the sale.
* Use qualified professional advisers; mistakes can cost a great deal more than the expense of competent advice.
* Be able to articulate your valuation rationale, otherwise it's a loser's game arguing between a higher and a lower price.
* Don't promise that "nothing will change"; it's better by far to discuss what things it makes sense to change.
* Conduct proper due diligence. It's your chance to ask the big questions.
Finally, remember that there are two parts to the acquisition: the having and the holding. Once you have the acquisition, you have to "hold" it by integrating the acquisition within your overall organisation: financially, operationally and in terms of management and leadership.
John Burnett is Senior Business Broker at Investor Business Brokers Ltd.
www.bizbrokers.co.nz
