Ask Us How: Acquisition and Expansion of Your Business

Posted by Michael Derin

Published on October 16, 2013 under NSW Business Chamber Partnership

After several years in business it is not uncommon to find you start to consider further means of increasing business profitability through other means. 

Through my experience there are many options available to grow your business; today I will concentrate on how to grow your business through acquisition or expansion. 

The appeal of acquiring a business to automatically increase turnover and profits involves a great deal of thought and due-diligence as does increasing working capital to continue business success. 

I will outline the steps you should consider whilst avoiding the pitfalls and educate you on why it has worked many times over for successful business professionals.   

THE START – WHAT SUCCESSFUL BUSINESSES DO BEFORE ACQUIRING OR EXPANDING THEIR BUSINESS?

Whether looking to acquire or looking to raise capital for the expansion of your business there are many simple rules you should follow.

Acquiring a business:

If acquiring a business it is essential that you have a sound due diligence process in place.  As mentioned previously the major pitfall is that you don’t investigate the acquired company and end up with a dud!  We will explore this in more detail a little bit later.

Other factors to consider include:

-       Is it a major competitor of yours and does this mean more market presence for your business?

-       Does it complement the services or product you already sell?

-       Where is the business located? Does it involve your business expanding overseas or interstate?

-       Will the owner be part and parcel of the acquisition?

-       Are you keen to tackle a new market with the acquisition of this business?

-       How will the acquisition of this business compliment your current customer base – will you be able to cross sell services or products?

As a business owner you want to be taking into account the reasons for wanting to increase your market presence and business success.  If you have not thought clearly about what your vision and goals are then the likelihood of acquiring another company would be slim. 

If you have a clear vision, a solid business plan, executive summary and financial models around the critical success of acquiring a business then you are taking the right steps to ensure business success.

THE IMPORTANCE OF DUE DILIGENCE WHETHER ACQUIRING OR EXPANDING YOUR BUSINESS THROUGH PRIVATE INVESTORS

I mentioned before that I would outline the steps you should consider and the importance of due-diligence when acquiring a business.  It is quite simple really, many acquisitions result in failure, normally due to the inadequacy of the due-diligence process as well as the limited breadth and duration of the process.

The expense of conducting a comprehensive due-diligence process is dwarfed by the costs associated with a failed merger or acquisition along with the time spent as a business owner trying to sell a business providing inadequate information. 

Experts have begun to re-examine the traditional due-diligence process of the past several decades to determine how to enhance its value.  Consequently, there are three important phases of due diligence: prior to, during and after acquisition and I believe the due-diligence team for all three phases should include the same individuals.

It is believed that three phases of a due diligence are necessary to effectively manage a merger or acquisition and I have to agree, reason being: 

-       Phase One – provides insight into the industries competitive structure and establishes an array of potential candidates

-       Phase Two – looks at the detail of the potential candidate and aligning what they have to offer with what you currently provide

-       Phase Three – looks into the integration of businesses once acquired as well as the involvement of a private investor if it is to do with raising capital.

Let’s break these down in a little more detail:

Phase One

Due diligence should first identify the primary motivation for considering a merger or Acquisition which we explored previously.  The motivation to purchase another company needs to be understood by the due-diligence team so as to better focus its search for firms.  At all times the due-diligence team must be aware of this motivation to facilitate the selection of target companies or investors.

The assessment of potential companies should provide an array of businesses that can fulfill the Acquisition or investor requirements of the company.  By conducting an in-depth industry due diligence, the acquiring company will not fixate on a limited number of candidates; rather, the acquisition process will include all firms that are potential candidates.

All too often, the search process is narrowed too quickly, and the motivation to acquire a target company overrides the broader appraisal of other firms in the industry.

Potential corporate "fit." To complete the pre-acquisition due-diligence process, the team must examine the potential candidates' compatibility with the acquiring company. A company may be an ideal M&A candidate from a strategic standpoint but may create significant integration or "fit" problems after acquisition.

Due diligence undertaken during the acquisition process needs to be expanded in both scope and nature. The scope must go beyond the traditional accounting; financial and legal issues usually considered and take into consideration the importance of intangible assets involved in an acquisition.

Phase Two

It is expected that through Phase One your due-diligence team would now be aware of your target market and ensure that any potential candidate will align with your current culture, market position, strategic direction and myriad of other considerations specific for your business.

In Phase two your due-diligence team will have created a short list of potential companies or candidates that align with your vision.

It should be your expectation that your due-diligence team has responsibly compiled a list of suitable companies that align with what your requirements are.

From this short list you now have the opportunity to assess each company and decide on a suitable merger or acquisition. 

Phase Three

You may think that once you have acquired or merged with a business that the due-diligence process is complete, I am of the opinion that it continues even if completed by a transition planning team internally.  The reasons for this include:

-       Firstly you now have the most detailed information about the acquired firm and it is imperative that the transition planning team has the ability to mold functional operations together including Human Resources, Operations, Administration, Sales, IT, the list is endless.

-       Secondly, there are critical integration issues that must be addressed when combining two organizations. Often, failure to address these issues results in a failed merger. Again, the transition planning team now has the insights which are invaluable in accelerating the amalgamation of the two operating entities.

-       Thirdly after the acquisition, focuses on standardizing the reporting systems of the two operating units and accelerating the development of an accounting system to monitor the financial characteristics of the acquired company and aid management's decision making requires consistency in reporting periods, measurements and analyses, as well as similar reports for the management of both entities. All accounting/financial aspects of the new entity must be effectively communicated.

-       Finally possible conflicts, overlap and gaps of both the acquired and acquiring companies need to be checked for consistency and integration issues addressed as quickly as possible after the acquisition or merger. 

In my belief if all three Phases are followed carefully the due-diligence process should not be viewed as a cost but as an investment in reducing the probability of failure of a merger or acquisition and a way to enhance the value of the combined entity. 

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