Business Growth through acquisition

Business growth can be achieved either by boosting the top line or revenue of the business or by increasing the bottom line or profitability of the operation by minimising costs. Over the last 5 years, since the recession hit, businesses have focussed primarily (and rightly so!) on achieving business process efficiencies and cost reduction in the absence of buoyant market conditions. Now, with more efficient business models, 2013 may be the year to refocus on business growth.

Economic commentators have continually reminded the Irish government that the Irish economy needs some form of financial stimulus or similar measures to help it return to growth. Entrepreneurs and business owners now need to take a similar approach to growing their business. Growth can be achieved ‘organically’ through increased investment in marketing and business development activities or alternatively, growth can be achieved through acquisition.

Developing the Acquisition Strategy

As business owners, it is important that you formulate your business growth strategy before rushing out to seek out a potential business acquisition. The starting point should be a detailed S.W.O.T. analysis of your current business to determine its strengths, weaknesses, opportunities and threats. This process will help focus your attention and identify the key areas where an acquisition can deliver the maximum benefit to your current business. This process will help you identify the ‘acquisition criteria’ that best fits with your overall objective.

Examples of this may be:

• you have surplus production capacity and wish to acquire a client base without production staff/facilities
• an oversees competitor has entered your market and you need to expand your product range to retain key customers
• a competitor is established in a geographical area where you see significant opportunities for your business 

The acquisition criteria will include:

1. Target Type - Competitor / Supplier / Complimentary Business etc
2. Target Financials – Turnover / profitability / asset valuation
3. Target Location – Leinster / UK / Global / Internet
4. Target Acquisition Funding – Own Resources / Bank Finance Available / Equity introduction
5. Deal Structure – Earn-out / Share for share / Loan notes

The adviser’s role in negotiating and completion of the deal

Your corporate finance adviser will play a key role here as they will act as project managers at each stage in the process. It is important that there is clear agreement of roles from the outset and your adviser will issue an Engagement Letter which outlines their understanding of your requirements during the assignment.

The adviser will usually initiate contact with a Target company (or their advisers) on behalf of the client and initial exploratory meetings will be held if the Target company wishes to engage in the process. In advance of any exchange of information between both parties, a Confidentiality Letter will be signed. If there is an agreement in principle agreed between buyer and seller, then the process will move to formal due diligence and drafting of legal agreements.

During the completion stage, the corporate finance team will perform due diligence on the Target’s business, reviewing all financial, tax and legal areas. The outcome of this process will be invaluable to assist the purchaser’s legal adviser to include necessary warranties and indemnities when finalising the legal agreements.

Dylan Byrne is Director in OSK. Call OSK Dublin Accountants today for all your corporate finance services.