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Corporate Finance: Drivers for acquisition

In the first of a series of posts about Corporate Finance, we look at 5 key drivers for companies looking to acquire others during the next 12 months. In our next edition we will cover preparation for sale.

  1. There is risk involved with an acquisition, but acquisition and merger are still the most effective ways, to enter a new market, to add a new product or service, and to grow a company. Certainly when trying to establish a presence in a new country, acquisition is often the best way forward. Risk can be mitigated by careful financial and legal due diligence.
  2. The concept of a one-stop shop: Customers and clients of a company like to stick to one supplier that they trust, and companies benefit from being able to offer a larger range of service and products. One example is professional services with the growth of multidisciplinary firms - firms acquiring other specialists as a quick way of gaining expertise in a sector.
  3. Risk management / defence can be an alternative driver than seeking growth. In a difficult market, merger can be an effective way of protecting the business, by allowing duplicate costs to be cut over the combined business, or by selling off non-core elements. At the time of writing Sainsbury and Asda have announced their wish to merge: whilst this will provide quick growth, the driver may be more to manage the risk posed by Amazon moving into the grocery market. Tesco's earlier acquisition of Booker to give a wholesale strength was a similar strategy to protect against Amazon.
  4. Long term customer relationships, by their very nature take a long time to create. A key goal for acquirers is in making sure there is a loyal customer base, preferably 'locked-in' with long term contracts. If a company operates in an associated industry then on acquiring the company with a loyal customer base, it then has a good ability to sell its own products to those customers, benefiting from the trust they have in their existing supplier. The acquirer therefore pays a premium for this goodwill, which is over and above the assets that are on the balance sheet. During the sales process a seller will need to balance demonstrating a diverse, loyal, stable, recurring customer base (one that has little dependence on key customers), but at the same time preserving their confidentiality.   (More on this in our next Corporate Finance blog post).
  5. Market trends: Acquisitions can be driven by what is happening in the markets that companies operate in. The third driver above refers to the grocery sector, which is consolidating as companies seek to drive down cost. Accountants acquire others to address succession issues, or deal with increased pressure of offering regulated services such as audit. Changes in regulations can play an important part: power tariff changes and huge volatility in gate fees for the waste & anaerobic digestion industry, have led to consolidation amongst operators.

Key to finding a buyer for your company is appreciating how these drivers operate in your industry, and then, with those in mind, thinking about what will motivate buyers to acquire your company.

As a seller you would ideally wish to be able to demonstrate some or all of the following: -

  • A proven track record of generating cash;
  • A strong management team;
  • A stable customer base;
  • A history of growth in turnover;
  • Strong projections that show that turnover growth and cash generation continuing;
  • Low risk of obsolescence
  • Some barriers to entry, such as cost of getting into the industry, or strong customer loyalty being prevalent

CBSL Accountants' Corporate Finance team have a proven track record of helping companies to acquire and business owners to sell. We help you to identify possible buyers, to understand what those buyers are looking for, and how to present your company to them in a professional way, to maximise the chances of selling your company

Most transactions we work on are in the range (albeit large) of £3m - £100m, but we can also help with smaller transactions. Typically, our clients are in the Midlands, Wales and North West, but we are able to support sales and acquisitions around the UK.

For a confidential discussion, please contact Adrian Barker: [email protected]