Selling Your Business

Don't ignore the red flags: Picking the right company for acquisition

5 min read

04 December 2018

Deputy Editor, Real Business

The Supper Club’s most recent report, entitled Buy To Build, asked its membership of high-growth entrepreneurs, as well as partners, about approaching an acquisition deal.

Despite Brexit uncertainty, the M&A market has remained strong. In fact, there were 3,458 UK deals worth £233.9 billion in 2017.

This has largely been attributed to a bigger focus on strategy, which begins by identifying and approaching the right deal.

That’s what Matt Katz, one of the partners of The Supper Club, suggests.

As head of corporate finance at Buzzacott, Katz advises numerous clients on acquiring the right business. His main advice? Don’t attempt an acquisition too early.

When you believe you are no longer able to reach your strategic or personal objectives from organic growth alone, that’s the opportune time to seek an acquisition.

Expanding on the topic, he says: “An acquisition needs to align with having the right internal teams, good finance, HR and operations to plan for, transact and execute said acquisition.

“You also need to make sure you have enough time, usually a year or two, post transaction to fully integrate the business so as to maximise the probability of a good return on investment before you ultimately exit.”

Once you’ve decided to go down the acquisition route, there are three ways to identify a worthy business.

(1) Trust

According to Katz, business owners should pick companies owned and managed by strong, sensible and trustworthy individuals.

“If you focus on understanding the motives of the vendor and what they are really looking for from a transaction, the relationship you will create will make for a successful acquisition,” he says.

(2) Identify the synergies

The second rule is to identify areas in which you can maximise your value.

“You need to be able to recognise what your upside is from doing the transaction,” Katz explains. “Buy what you know and understand. You will find it far easier to maximise the synergies and minimise the risk if you have a clear understanding of the business and market it operates in.”

(3) Quality of earnings

He adds: “Ensure the business has good, solid recurring revenue streams or a strong, diverse client base. If not, steer clear or, worst case, have a clear plan to rectify this and make sure that you don’t overpay.”

Don’t wait too long to acquaint yourself with the company though.

Katz suggests approaching them early. Get to know them, not their adviser. Understand their motives for sale and share your values and motives with them.

The best transactions are built on trust, after all. And that trust has to endure through the transactional process, and often for several years after.

The report makes clear that you will need to act as a guardian for their legacy, so pick your words and form of approach carefully: “It’s an emotional experience for any owner when someone offers to buy their business.”

Supper Club members suggest outlining acquisition strategies on a private website. This can include testimonials as reassurance.

Do this without giving too much of your own growth strategy away, they caution.

“This is particularly if you are looking to acquire competitors,” the report concludes. “If you identify where they can grow, and where they’ve missed a trick in various markets, they could get a new lease of life and do it themselves.”

Alternative options to approaching a company could be LinkedIn or having a trusted third party speak to them on your behalf.

Don’t ignore the red flags

Aside from the timing, there are red flags business owners need to look out for. Any of these, Katz suggests, indicate you shouldn’t acquire the company.

First impressions count. Unfortunately, if you get off to a bad start with an acquisition, things “usually just get harder,” Katz maintains.

Another flag is the quality of information flow. If there’s a lack of transparency, and you’re struggling to gain clear and current information, then that company might not be a reliable one.

Of course,  if your motives aren’t aligned then walk away, don’t try to force a transaction.

Lastly, take a good a look at whether they minimise their tax bills.

As Katz explains: “Whether through the use of consultants over employees, or through overzealous share schemes, the penalties and costs that can arise as a result of these are often material and, on more than one occasion, have been known to derail a transaction.”