Growth through acquisition – what you need to know! 


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Growth through acquisition – what you need to know! 

SME MASTER PLAN SERIES – PART 2 OF 4  

Part 1 of our series covered “the importance of having the right business structureClick here for article

This article is the second of the four-part series aimed to help SMEs leverage opportunities to boost their business in these distressing times.  It outlines “what you need to know when considering growth through acquisition”. 

Businesses need to grow and innovate to stay relevant and competitive.

The question is, can they achieve the growth they require organically or should growth through acquisition be considered as a viable option for small and medium-sized businesses.

There is no “right” answer, but before a decision can be made, there are important discussions needed on this topic and every situation is different.

When is the right time?

Under the current economic environment, many businesses are finding it difficult to survive, let alone achieve their growth aspirations, particularly through organic growth.  This creates an ideal opportunity to consider growth through acquisition.

However, we find that often in a downturn environment or periods of uncertainty, business owners are reluctant to commit to such capital expenditure.  The reality is, that under the right circumstances, growth by acquisition can be a successful way to generate growth in these times, due to the following:

  1. Prices will not be unrealistic
  2. The combining of businesses could help cover existing overhead fixed costs and allow you to survive a liquidity crunch
  3. An increase in volume could reduce input costs
  4. Increased turnover could benefit an increase in marketing expenditure which would assist further growth.

Of course, that does not mean that you should pursue acquisition growth under any circumstances or that you should acquire something for the sake of it.  There needs to be good strategic and financial reasons for any acquisition.  For example, the acquisition could be a competitor business to consolidate market share or a downstream supplier or upstream distributor; all could be compelling to acquire.

The most important factor is that it makes strategic sense and is financially responsible.  This requires a clear understanding of what part the acquisition plays in achieving the growth strategy to be established way before any deal is considered.

Benefits of Acquisition

Integrating two businesses to extract value is difficult and if not done correctly, could adversely affect the existing business.  Remember, you do not acquire a business merely for incremental value.  You would hope the existing business, together with the acquired business, would generate more than the sum of the parts.  That is, you would expect that 1 plus 1 is greater than 2.  This is not only from an overhead savings and economics of scale but also from greater market penetration etc.

Acquisitions in economic downturns can have two advantages.

  • Firstly, they are a defensive play giving a buffer to cover the existing infrastructure.
  • Secondly, they are an opportunity to stabilise your market, especially where a target is in distress.

An acquisition can also help ensure there is not too much damage from uncompetitive actions often undertaken by distressed business that try and hang on and survive.  Such practices could lead to margin deterioration and or product quality issues, both of which could have detrimental impacts on your business.

Two important first steps

Targeting a business and deciding to acquire it, although the first step in a process, is also usually the easiest step in an acquisition process.

The two crucial steps that need to be undertaken before proceeding with the transaction are:

  1. Due diligence: When you are thinking of purchasing a business, due diligence is one of the critical key steps that should not be overlooked. This ensures that the purchaser knows all there is to know about the target business and what information needs to be investigated.  Often, the business owner already has considerable intelligence on the target business if they are in the same market segment.
  2. Business valuation: Haggling over price can often be an issue when purchasing a business.  What a buyer thinks it is worth and what the seller thinks it is worth are usually very different.  This is even more difficult due to the complexity of the transaction, involving factors such as cash flow, sales trends, customer and supplier base, profitability, asset values, key business relationships, goodwill and much more.  A business valuation is not just about the numbers.  It is a complex qualitative exercise, which is why it is recommended to obtain an independent business valuation by an accredited business valuer.

Five acquisition mistakes

Below are five (5) common mistakes we often see when business owners are dealing with acquisitions: 

  1. Searching for opportunities at the expense of business operations: looking for the right deal, should not take priority over the daily business operations.
  2. Not doing your due diligence: this is a fundamental step and should be carried with the view that all the findings should be seriously considered, both positive and negative.
  3. Getting the funding structure wrong: this involves either miscalculating the future performance of the target company or taking on too much debt, making the servicing difficult.
  4. Ignoring the people: the value of a business often lies with the people.  They should be included in the communication and the cultures of the merging businesses considered.  You need to ensure cultures match.
  5. Getting the right professional advice: business owners are often working in the business and don’t have the time needed or the necessary expertise to manage the process.  Involving an independent expert can help with this and also means that emotions are kept out of the decision and they can also have the sometimes needed difficult discussions with affected individuals.

In summary, now more than ever is an ideal time for acquisitions to be considered as a successful growth strategy.  The success of an acquisition lies in the preparation by having a clear strategy, completing the proper due diligence to manage the risks and a full business valuation to know the true value.

dVT Group can assist with this preparation and are happy to work with you to ensure your clients are prepared to ensure that the combined businesses are in a better position to capitalise on its market position once there is an economic recovery.

Next month our article will be on Funding for growth.

Author profile – Riad Tayeh:

Riad is a partner at dVT Group. He has over 30 years insolvency and accounting experience and enjoys a reputation as a tough-minded and astute practitioner, offering clients an energetic and practical approach to business solutions. He is a registered liquidator and specialises in insolvency, corporate restructuring, financial investigation and turnaround strategy.

dVT Group has a proactive, practical and pragmatic approach in the way we collaborate and provide advice.  We can efficiently distil the issues and provide sound, common-sense solutions, sometimes fitting square pegs into round holes!

If you would like to work with us to ensure you are setting up the correct business structure, please contact Riad Tayeh at dVT Group on (02) 9633 3333 or by email mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

September 2020