You’ve made the decision to buy a business or pursue acquisition led growth of your existing business. Such an acquisition may enable access to new products, expertise and customers along with improved operating efficiencies and cost synergies. This can provide some great growth and return on capital opportunities for the business though there are many factors that must be carefully considered before signing on the dotted line. The following summarises some of the more important considerations that are common to most acquisition scenarios.
1. Valuation – Obviously one of the most important considerations that will directly impact the success of the acquisition and return on capital. Most industries typically have a set of benchmarks that provide some good parameters for an initial indicative valuation. These metrics include a multiple of profitability (typically earnings before interest, tax, depreciation and amortisation), net assets or in some instances a multiple of revenue or book value of assets.
2. Purchase of assets versus shares – The acquisition of another business is typically executed via a purchase of shares or assets. A purchase of shares incorporates an acquisition of the whole of the business including all assets and liabilities in contrast to the purchase of a defined pool of assets. A purchase of assets is generally preferred by acquirers as it eliminates the risk around contingent liabilities or other potential risk issues though there will also be tax considerations for both parties.
3. Non-compete clause – For small and medium sized businesses, a lot of a business’ value is embedded in the relationships the owner has with his clients. This must firstly be considered as part of the valuation exercise though also the arrangements that will apply post acquisition. In some instances, the ideal scenario is a defined transition period whereby the vendors stays on with the business in some capacity to assist in transferring some of the value of this relationship to the new owners. The longer term intentions of the vendor should also be well understood and reasonable constraints put in place in the sale documentation that prevents the vendor from competing against the business for a defined period (typically for a period of around 3years).
4. Execution – The acquisition of another business and the integration process typically takes longer and costs more than expected at the time of the acquisition. The integration of people, systems, supply chains and premises can often be a difficult and time consuming process that should be carefully planned prior to executing an acquisition. A 100-day plan is commonplace for large corporates undertaking acquisition and the same principles should also apply to small and medium sized business.
5. Funding – The key funding considerations will be the optimal level of debt used to fund the acquisition. The assets and earnings of the company being acquired in addition to the acquiring company can be used as a basis for debt funding. The optimal level of debt will be based on both the debt capacity of the enlarged group and the risk appetite of the owners as a higher level of type typically means the potentially for a higher return on capital though also a higher level of risk.
Contact CreditSME today (1300 001 567) if you’re considering or in the process of acquiring another business and would like to discuss your debt funding alternatives.
