BUY AND BUILD – HALF OF ALL ACQUISITIONS FAIL, SO WHY MAKE THEM..? How many things would you buy if you had a less that 50% chance of them turning out to be what you expected? So being fearful of developing your business further by acquiring is natural. However you are not doing your business justice if you don’t consider acquisitions as a cost effective tool in your growth toolbox. I have been involved in over 25 acquisitions as principal (not just advising) over the past 15 years and here are 3 reasons why you should consider Acquiring:
It can be Cheaper
Without doing the maths, people assume they can grow organically (with their own sales team) cheaper than they can grow through acquisition. This isn’t always true. Do you know the true cost of your growth? The cost of your sales team is the obvious one. But have you allowed for sales team nonperformers and churn, the recruitment and redundancy costs? Are you loading all associated costs (marketing, PR, admin, vehicles, technology, infrastructure etc.), the capex costs, working capital required, the cost of the capital you are investing in all of this? Most importantly do you know the lifecycle of a contract or customer and its total expected revenues, bottom line profitability when all
costs are deducted and most importantly cash generation? Is customer profitability consistent over its life or do you make more in the early years or more in the later years? What is your percentage of customer churn? What is your sales / tender success rate and the average sales cost per customer? With so many questions, you are probably thinking this is more relevant for IBM than my SME business. It sounds a lot, but by getting the right members of your team in a room with some basic data you can answer a lot of these questions fairly quickly. The insights can often be shocking. Do the Maths, because the sums can sometimes make acquisitions attractive. In lots of circumstances it is cheaper to grow by acquisition than organically. My golden rule is that where acquisitions are used they should always be used to complement or strengthen organic growth but never as a substitute. Organic growth is vital for business longevity. 2.
They can help you Grow Faster
Organic growth can be slow in lots of sectors. It can be down to internal factors such as the speed or risks associated with developing new products / technology. External factors can also make growth slow in sectors with high levels or inertia or where product / service differentiation is difficult. Sometimes you need to acquire businesses to travel your journey faster. Like partnerships, alliances and joint ventures they can facilitate accelerated growth. You can materially reduce risks by acquiring operations / expertise in areas or geographies where you are weak which would take time to build from “scratch”. If you operate in a highly competitive sector sometimes you need to move fast or risk being left behind by the competition. 3.
You can reduce the Risks – 10 Tips
The main factors impacting on the risks and rewards. When you look at the cost / benefit of an acquisition the maths are sometimes easier. Look at the main Factors for consideration that impact on risks and rewards of making an acquisition. Be able to get comfortable with: •
Be very clear on why you would like to acquire a business before you consider costs, affordability, funding, risks etc… These can be for growth or defensive reasons and can deliver: Scale economies, Fast Growth, Complementary Businesses, New Market Entry, Customer Acquisition, Technological Capabilities, Great People etc… – Visit “My Acquisition Checklist Blog”
Ask yourself will you keep their Customers and if so for how long on average? Does the acquisition bring a sales team / sales machine and if so you need to look at the performance of this unit on its own merits (like you analyse your own sales team). Is there customer exposure with large revenues / profits associated with particular customers? What happens if a number of customers stop doing business? Does a change in control of the company trigger a default in the customer contracts? Who has the customer relationship? •
Profits – Before and After
What is the value to the current owner and its value to you? Can you make it more profitable, grow faster or less risky? Do your analysis on possible integration and synergies to be clear on the profit and more importantly the cash flow you can generate if a target was under your ownership. Be conservative. •
It is very difficult for SMEs who are growing through acquisition to maintain multiple cultures of acquired companies post acquisition. Acquisitions bring change. Make the change early and communicate it openly and honestly. Once change has occurred, you can begin to implement. •
The term Buy and Build omits the most important ingredient to the success of any acquisition and that is the Integration process. This needs to be planned in detail and its implementation team should include people who have been through the process before. If you don’t have these skills in-house look for external help. A lack of in house capability shouldn’t deter you. If you feared doing new things your business would have stagnated before now. The level of optimum integration can vary from one acquisition to another. If full integration is the right thing to do don’t look for an easier option and procrastinate. In the words of Nike “Just Do It”. •
I always try and answer the question – Why Us? When we have the opportunity to acquire or invest in a business. The vendor has more information about the business and is selling it. So why are we buying it? We must establish that there is a genuine reason for selling and that we fully understand the business and can bring something to the table.
Most acquisitions fail because acquirers overpay for them and they then fail to deliver the expected or required returns to justify the price. Don’t set yourself up for failure and overpay. If competitors are over paying for acquisitions in your industry don’t be a sheep and follow. I have experienced this before and seen competitors first hand implode by being too aggressive with acquisitions. Don’t Bet the Bank An important lesson in life and business is to “Live within your means” and don’t take disproportionate risks with your business. Be sure that you never expose yourself to leverage that is too high. Don’t be afraid to start small with acquisitions and be wary of biting off more than you can chew. In life once you get financial security for you and your family – never put it at risk again. Only take risks where you can afford to lose. •
With any large purchase do your homework well. Shop around and find the right potential acquisitions – even if today they are not available. You should develop a “wish list”. Often companies only think about acquisitions when they find out a competitor is considering selling. Proactively do your homework and be prepared. It will ensure you complete the right acquisitions for the right reasons if they become part of your growth plan. •
Know your Parachute
I always develop a backup plan which can be implemented in an emergency. If you are acquiring a business out of insolvency or one that requires a turnaround be sure to have a Parachute (exit plan) that can save you if the business (plane) is going down. If you end up with a business that turns out to be unexpectedly materially different to what you thought. You can protect yourself from the risk in many ways but make sure you protect your own business.