You’d expect a company that has made six acquisitions in the past 11 years to be bullish about the impact they can make on an entrepreneurial business – and you’d be right. Paul Jameson, owner of Swindon-based recruitment firm Outsource UK, believes sealing quality acquisitions has been fundamental in spearheading quicker revenue and market-share growth.
“Organic growth is the cheapest way to build but it takes a long time to achieve,” says Jameson, who founded the supplier of IT and engineering staff to businesses, in 1991. “Our acquisitions have allowed us to gain clients, add new revenue streams and locations and grow scale much faster. Also, in our industry where talented staff are hard to come by, we have added new skills.”
Other attractive factors could be companies with patented ‘next big thing’ technology or global presence. Carl Allen, founder of advisers Ninja Acquisitions, says acquisitions can also mean ‘cost synergies, better buying power and cross-selling opportunities’.
So how to begin?
Allen believes networking is key. “If you are a 60-year-old owner of an engineering business you tell your spouse, your solicitor, your accountant and the bank that you want to sell,” he says. “So, if a buyer has a close relationship with their advisers they will become aware of potential opportunities off market.”
Jameson has identified targets through brokers, writing letters to gauge an owner’s interest in selling, being approached directly by firms looking to exit and using personal networks.
“I imagine what the company will look like when it is part of my business,” he explains. “What is the quality of their staff, customer and supplier relationships and what do the supply contracts look like? Are they committed only to the vendor or will they continue the relationship post acquisition? We try and understand the people culture as it is very important if we want to assimilate them.”
Jameson calls this business due diligence – fully understanding what he is buying. He also has an eye out for warning signs. “One target I approached didn’t understand the numbers in his business, how and where it was making money. If people are not open and honest with you then you need to walk away so issues don’t come back and bite you,” he says.
Other tips include looking at customer concentration, so which customers bring in the most revenues, and staff and customer/client loyalty. Jameson says he is in the best position to carry out this due diligence before an accountancy firm carries out the financial due diligence and the lawyers work on legal due diligence.
“There are some areas a buyer can do themselves but the biggest mistake they can make is not hiring a team of advisers to help them,” Allen states. Accountants look at VAT returns, the accuracy of the balance sheet and the profit and loss accounts. They investigate cashflow, recording of business assets, debt repayments, other financial liabilities and risk management.
On the legal side, Chris Wilks, head of the corporate department at SA Law, explains that the lawyers will advise on the seller’s warranties and disclosures, which are statements declaring the accuracy of the information the buyer is relying on, including key contracts, tax structures and property holdings. There will also be a tax covenant, which is designed to protect against unexpected tax bills. They can also advise on the structure of the sale – either an asset sale or share sale, look at key personnel employment contracts and whether any customer contracts will terminate on change of ownership.
Lawyers and accountants will also come up with a valuation of the target company. Jameson explains: “It’s a thorny one as most deals fall down on this question. A vendor will have an inflated value of what their company is worth, whilst you have to ask how much the target company is worth to you based on how much it will improve your profits.”
Whatever the challenges Jameson believes entrepreneurs need to make acquisitions. “Some work, some don’t. It can be a gamble but you have to be pro-active,” he states. “If you just sit around and wait for the one who you think fits the bill it may never happen.”
The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.