The Case for Acquisitive Growth; Use Your High Beam

It’s true; in times of crisis, disaster, trouble or significant change, leaders typically revert to dipped beam and become inward facing and quite rightly so. COVID-19 has been billed as a ‘once in a lifetime’ crisis and is having an unprecedented impact on our personal lives, our people and our business activities. Many believe and say that we should plan for the unexpected but how could we have planned for this – most of our crisis and disaster management plans, have gone out of the window.

Where are you now?  

Consider the slide below. Where ar you and your business on this journey and time line?

I suspect most will be in the Stabilize phase and perhaps too many will wait for the new normal to appear.  Why wait, it’s time to use your high beam, look through and beyond the crisis and Strategize. Start by asking yourself 

  • Is your core purpose and business plan fit for the future?
  • Is the business agile and change ready?
  • How will you grow?
  • Where are your opportunities, how will you prioritize, and do you have the facilities or funding to realise the added value?
  • What might your business model look like in 1 year and in 3 years?
  • Do you have the skills, the technology and the capabilities to make your business successful and sustainable going forward?

 

Plan to emerge stronger through profitable growth

Most businesses plan or default to grow organically but have you at least considered M&A, acquisitive growth? Organic growth comes with its own challenges and most will acknowledge the degrees of difficulty and risk, in Ansoff’s classic 4 box matrix below.

FACT:     45% of SME’s fail in the first 5 years, typically failing to plan and failing to grow. 

INSIGHT:     In a recent survey of SME’s conducted by Factworks, over a 2-year period, they cited the top two external challenges

  • Finding and attracting new customers 79%
  • Increasing revenues 59%

The cost of organic growth is seldom measured and is seen as ‘business as usual’ - a sunk cost. Over time it can be more expensive than an acquisition and in all too many cases the ROI is poor or non-existent.

The case for acquisitive growth

I am not suggesting that growth by acquisition is necessarily right for you or that it is a better route than organic growth, that’s not for me to judge or decide. However, it is a real alternative in acquiring new skills, capabilities, technologies, customers, channels and/or products and services. In addition, we are probably about to enter a period when there may never be a better time to buy a business and to invest in growth.  Some believe that acquiring in times of economic or political uncertainty is predatory - it’s no more predatory than recruiting a new person or acquiring a new customer. In a time when we are likely to face double digit unemployment rates and a double digit decline in GDP – acquisition is one way to protect jobs and preserve skills while future proofing your own business.  Our Sector needs gains in profitability and productivity in order to grow and sustain ‘made in the UK’.

The media highlight aggressive and often unwelcome takeovers. However, SME acquisitions almost without exception occur when; a willing buyer finds a willing seller, there is common ground around personal and business objectives and when the sum will be greater than the parts.

The Stats and Facts

Recent reports issued by KMPG and BDO said M&A in manufacturing is alive and kicking. Forward thinking Manufacturers are investing in new skills, technologies, capabilities and channels. Transactions in our Sector are rising, driven by diversification and digitalization.

FACT:    Over the last decade the value of UK domestic acquisitions (UK Companies buying other UK Companies) has been pretty constant at around £10bn per year.

Interestingly during times of economic and political uncertainty this figure typically doubles, this has been the case after the last 2 recessions and the period following the Brexit referendum.

MYTH:    Acquisitions are the domain of large Corporates with deep pockets

FACT:    On average there are between 15 and 20 thousand transactions a year. The vast  majority, over 90%, are SME’s. Manufacturing is in the top 3 Sectors and it is on the rise.

MYTH:    I will need huge cash reserves or will have to take on significant debt.

FACT:    Valuations have never been more realistic. There are options on deal structures and a plethora of external funding options not to mention deferments or earn outs. The latter not only reduces the upfront payment on completion but enables the buyer to benefit from the achievement of future targeted earnings, before paying the agreed price in full.

FACT:    Private Equity funds are at an all-time high and most believe they are poised and ready to be aggressive. From recent activity and interest, it seems many of these funds see the Manufacturing Sector as fertile and ripe for investment and growth.

Generic Pros and Cons

Pros and cons of acquisitive growth compared to organic growth

PROS 

  • Acquisitions often enable businesses to access new markets, technologies and skills more quickly than organic development. As the pace of change in business increases, acquisitions can provide the means to adapt to evolving strategic priorities. 
  • There is scope to generate synergies by building on the strengths of each business. 
  • Results of the acquisition target can be tested through a diligence process, whereas organic growth is often less simple to ‘prove’. 
  • Management team, relationships and operations are established. 
  • The acquirer is likely to deny advantage to a competitor. 
  • Organic growth may not be an option if there is already a business operating in that space.
  • Valuations have never been more realistic, and many willing sellers are motivated by personal objectives and the security of their business which go beyond the transaction value. 

CONS 

  • Up-front costs may require financing and the acquisition may be more expensive in the long run because the vendor may require a premium to compensate for set-up costs and ‘proving the market’.
  • Acquisition is likely to require changes and costs to achieve synergies, desired working practices and culture. 
  • There is a key ‘person’ risk – key individuals can leave. 
  • The potential for negative synergies or for integration delivery risk – often arising with a lack of robust post-deal integration plan.

7 Key Considerations

Preparation   

Strategize, start with a strategic review of your business to identify gaps and opportunities and to focus on what will add the most value to your future business. Setting appropriate acquisition criteria at an early stage will keep the focus on what will add the most value.

Review of the Market        

A thorough review of the market is key in identifying target Companies that fit and meet your acquisition criteria. A review of customers, suppliers and competitors is usually a good starting point. The most successful acquisitions add something new and over 80% of willing sellers are approached, they don’t come to market. 

Valuation   

Time and money can be wasted if a value is not agreed at an early stage in the negotiations. Make sure price expectations of the buyer and seller are broadly in line. Don’t play your hand too early, let the seller value their business and explain how they have arrived at their valuation.

Structure   

Typically, acquisitions are either a share purchase or trade and assets purchase. Each have their respective merits and pitfalls to look out for and of course, the tax implications have to be considered throughout the process.

Funding   

Understanding how the deal will be funded plays a pivotal part in the success of the transaction, together with the ability of the combined business to continue to trade without significant working capital constraints.

Due Diligence   

A critical part of the process to ensure that key risks are identified and considered prior to completion. There are several due diligence workstreams and these seek to bring the buyer comfort and to make sure you understand fully, what you will get for your money.

Post-Acquisition

The integration plan should be a key part of the acquisition planning process; the integration of people, systems, finance, customer and supplier relationships, branding and the effective management of internal and external communications.

In conclusion, use your high beam to strategize, to visualize your future, to regain external perspective and to plan for growth. By all means discount acquisitive growth in favour of organic, but don’t ignore it. 

If you need help or support – just ask.

"Let us all be the leaders we wish we had"

Simon Sinek

"Be the architect of your own new normal"

Simon Carin

This article was written by Simon Carin. Simon had been a General Manager for over 3 decades and has worked at Board level as an MD in the UK and in Europe, for nearly 20 years. His experience covers a wide range of activities and disciplines including; Distribution, Manufacturing and Installation. At the heart of all of this was our customer, typically an Owner Managed or SME business.