M&A: Scaling-up through acquisition

If you’re looking to accelerate growth, acquisition could be the answer: but it’s not right for every business. We look at the risks and rewards of choosing M&A as a scale-up strategy.

With the right planning and support, acquisitions present an enticing opportunity to fast track expansion. A poorly managed acquisition, however, can destroy value far faster than it creates it.

Identify your needs

A successful scale-up acquisition is almost always driven by a requirement within the business. Whether that’s access to a new market or the skillset of a particular team, acquisition can allow you to capture the resources you need to get your business to the next stage. But acquisition may not be the only option, or even the most rewarding.

If your business is facing a challenge, then identify the problem and take time to discover what needs to be done to fix it. If it is a resource that can be brought in through an external acquisition and you find a suitable target that meets that specific requirement: great. If it’s an internal problem, an acquisition will often only exacerbate the issue. Acquisition, while rewarding in the right circumstances, will put pressure on your business and your senior team: your business will need to be robust to take the strain.

Choosing the right target

Not all acquisitions succeed, and those that don’t fail outright can still struggle to become more than the sum of their parts. Those that do go on to create additional value tend to follow a blueprint for acquisition success, combining strategic targeting, due diligence, a strong vision for growth and a cohesive post-merger convergence plan.

Perhaps most importantly, a successful acquisition brings together two compatible businesses. Buy a business you don’t understand – whether it’s part of an industry you have no experience in or has a workplace culture that’s very different from your own – and you could be facing an uphill battle when it comes to post-merger management.

2+2=5

Once you’ve found your target and identified how the two businesses can work together in a broader sense, focus on how you can create real synergy post-acquisition. The more you can plan in advance, the better.

Culture

Integration between leadership and staff in the acquired company and the purchaser won’t always come naturally, even in similar businesses. Years after an acquisition, an ‘us and them’ attitude can still prevail, to the detriment of your business growth.

Address this when choosing your target. Are your business cultures compatible – and can a new ‘best of breed’ culture be created from the combination? Once the acquisition is underway, be sure to communicate your corporate vision effectively and promote collaboration across the board.

Technology and data

Technological compatibility can be a problem for business combinations despite – or even because of – IT innovation. Bespoke IT systems can be problematic, with many businesses discovering post-merger that the two systems are unable to communicate effectively.

Addressing IT concerns is a key consideration during target selection and the due diligence process, particularly now that data has become an even more valuable commodity. Post-merger, make sure any transference is managed quickly and efficiently for best results.

Administration and logistics

No acquisition or merger can create additional value for the purchaser if it becomes bogged down in administrative and logistical challenges. A thorough due diligence process should be able to identify most practical concerns before they arise, allowing you to address the issues during the formal planning process and work solutions into your post-merger planning.

Toolkit: Growth through acquisition

Acquisition vs organic growth: What are your key reasons for acquisition? Have you considered alternatives, and researched the impact the process will have on your time - both through the transaction and after the ink has dried?

Selecting your target: Identify exactly what you’re looking for; purchasing a business that only ticks some of the boxes you need can be a costly mistake. It’s beneficial to identify a plan to create synergy at this stage, to save wasting time on an incompatible acquisition. It’s also crucial to outline your financial parameters early on, so that you don’t find costs spiralling beyond expectation later in the deal process.

Due diligence: When faced with an exciting opportunity, it can be tempting to cut corners to speed up the process. In an acquisition or merger, a shortcut is never a viable option. Although it’s impossible to mitigate risk entirely, a thorough due diligence process can eliminate significant hazards and help you to plan for the future.

Planning for the future: The hard work doesn’t end when the transaction is complete. Without a strategy to merge the two businesses together, any acquisition is doomed to stagnate rather than drive dramatic growth. Ensure that the findings of your due diligence form the basis of your growth strategy after the purchase, and keep sight of your corporate purpose and values.

Solutions

The Smith & Williamson scale-up team brings together the core services required to meet all of your financial needs.

We offer complete deal support, providing advice to help you throughout the transaction process and beyond, including help with structuring the transaction, financial due diligence, considering the tax implications and liaising with lawyers in relation to the sale and purchase agreement.

• Structuring: Providing commercial, pragmatic solutions to any complexities or tax implications of the proposed considerations and structure of a transaction.
• Due diligence: Preparing financial and tax due diligence reports.
• Deal costs: Identifying opportunities to maximise tax relief on deal costs. This is particularly important for VAT.
• Support: Providing ongoing support throughout the transaction process, including advice on the accounting and tax aspects of the sale and purchase documentation.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.