Rob Starr, Head of M&A at Shaw & Co, shares his advice on what strategic things business leaders need to consider when buying a business.
Not only is buying a business the ideal way in which to solidify a company’s position and offering in its chosen sector, it also provides the perfect gateway for a strategic leap into a completely new marketplace.
Nevertheless, once you have made the decision to grow your business through acquisition, it is vital that you take plenty of time to thoroughly define what you are actually looking to buy. Being able to list and prioritise the features of another organisation that can strengthen your competitiveness is critical for success. It may seem obvious but the risk of failing to do this leaves you open to justifying the suitability of an acquisition target simply because it is available, rather than it being what your business really needs in order to grow.
"When you buy a business, you are commonly paying forward many years' profits, so you need to ensure the business that you are buying will pay this investment back, and more."
Drawing up your acquisition criteria before you consider a target gives you an unbiased, rigorous profile of the business you are looking to buy. This should be used as the cornerstone of your search and when assessing the suitability of targets throughout the due diligence process.
So what things do you need to consider? Like everything in life, every business will be looking for a certain ideal - a certain type - but here are some key factors to consider:
What does this business do and how does it do it? How does it describe its value proposition (US) on its website and to its customers, suppliers and employees?
Does this business have certain proprietary technologies, or access to certain technology, skills or knowhow that can complement your own capabilities?
What financial scale will this business have? There will be a ‘right size’ – one that is not too big so as to make acquisition an unbearable financial risk for the acquiring company, but one which is big enough to really turn up the dial on your ambitions for growth.
What do you consider to the be a reasonable valuation of a target business? This will be expressed as a multiple of profits or revenue, but what is the maximum amount your company is willing or able to pay?
Is geography important? Does this business need certain geographical reach to compliment your existing business? How about management, does it need to be close enough so that it can be managed by your current team?
Are you looking to acquire a management team? Or are you looking to absorb the business into your current management structure and remove a layer of costs?
How important is culture to you? Do you have a specific culture within your business that would need to be mirrored by any acquisition target?
Are there any specific ESG (Environmental, Social, Governance) stipulations that an acquisition target would need to have? Having the right ESG strategy could be an advantage.
It’s important to keep in mind that any acquisition target is unlikely to meet all your criteria. Therefore, it’s essential that you develop a system, or balanced scorecard, where you have placed the strategic criteria in order of importance which will provide you with a simple guide you can refer to as you work through each target. When you eventually begin negotiation and due diligence it will also become a handy reference point that will help you stay focussed on your reasons for commencing the acquisition process in the first place, not to mention keeping damaging ‘deal fever’ at bay.
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