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SMEs - Acquisition for growth

30 May 2019

Corporate Finance

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An SME often gets to a stage in its lifecycle where growth aspirations need a step change from an acquisition in order to realise the full potential for its owners.

There are many reasons for undertaking an acquisition: new customers, new products or services, expansion geographically, increased diversifcation to name a few. Ultimately, it comes down to the vision and strategy of the business and, in the SME world, this will also be linked to the goals and wealth aspirations of the owners.

Where to find the right Target

Opportunities for acquisition can arise from a number of sources. You may want to do a targeted direct approach for known businesses in your industry, undertake research of other potential targets in the region (or the world!) or there could already be a business on the market which would make an ideal fit.

How much should I pay?

This is always a point of negotiation tension. Ultimately, valuation will be driven by the earnings potential of the Target and what the market is willing to pay. A common valuation reference is to apply a multiple based on ‘normalised’ earnings of the business. ‘Normalised’ earnings represent a level of normal expected operating earnings excluding any one-off, abnormal or non-commercial owner transactions. Multiples vary based on the industry sector, company growth stage and location.

Don’t take shortcuts on due diligence

Identifying risks and taking appropriate mitigations before acquisition can potentially save a lot of cost, time and frustration later. You will need financial, tax and legal due diligence expertise and, depending on the industry, other specialists may be required; make sure you are getting tailored due diligence from experienced transaction advisers. Also, if there are financiers involved, they will want to rely on the due diligence so ensure that they are also involved early in due diligence scoping.

Don’t forget people

Don’t underestimate the importance of cultural fit as different organisational cultures can conflict to the point of disruption; this will need to be actively managed. Also, who are the key staff of the Target and how can these staff be retained in the business? The use of earn-out targets, retention bonuses or management equity are common mechanisms used to ensure that key staff are retained or that the former owners have some continued involvement in the business for a suffcient transition period. At James Cowper Kreston we are able to advise you throughout the acquisition process, provide structuring and valuation advice and provide financial and tax due diligence to support the transaction.

For more information please contact me on the details listed above or via our enquiry form