What to look for when considering an acquisition

Acquisitions of businesses do not generally work out as planned! It is accepted that the majority of business acquisitions turn out to be not as the purchaser expected. There are many reasons why acquisitions can be problematic. It is critical that you identify and then manage the risks involved. Specific areas to consider include:

Strategic fit
It is essential that a potential acquisition is fully evaluated against the strategic objectives of the acquirer as regards the fit with the acquirer’s agreed plans (including sector, geography, size etc).

Management Time
Do not underestimate the management time that the acquisition will absorb and guard against your own business being overlooked as a result.

Valuation
Whilst a gap between the price expectations of sellers and buyers is to be expected, it is important that a potential purchaser fully considers the following areas when considering a sensible valuation for a target business:

Is the target business likely to be at peak valuation given its growth profile and overall sector performance?
Are the reasons for sale fully understood as well as the level of involvement of the vendors in the management of the target?
How robust are the maintainable profits of the target? Most businesses for sale will present their financial performance reflecting profit adjustments for non-recurring and/or exceptional items. These need to be thoroughly verified through a robust due diligence exercise, as do the expected cost savings or synergies
Have the historic cash flows reflected normalised levels of working capital and capital expenditure? On the other hand, are there any surplus assets in the target business e.g. cash not required for working capital or unused fixed assets?
Are the accounting policies of the target consistent with those used by the buyer?

Ongoing Working Capital
Do not forget to evaluate the expected working capital and capital expenditure requirement of the target company and to factor this requirement into your overall assessment of the viability of the acquisition.

People
Who the key people in the target businesses are should be confirmed at an early stage so that the likely impact of any acquisition upon them and the target can be understood. It is extremely risky if people with key relationships with customers and/or suppliers decide to leave shortly after acquisition.

Deal structure
The ability to structure the deal to minimise risks involved is also important for a potential buyer:

Is it possible to defer some of the consideration to be paid and, preferably, link this in an earnout to future performance of the target after acquisition?
What level of warranties (and retention of consideration against them) is possible?

Conclusion
There are many factors to be evaluated when considering a potential acquisition. If you consider the items described in this article there is a much higher chance of the acquisition being a success.

To discuss the details of this article, or to talk about acquisitions, please contact Steven Lindsay on 0161 245 1000