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Why more SMES should be planning acquisitions as a route to growth

on Monday, 23 September 2019. Posted in Growth, Finance

Major mergers and acquisitions are often in the news, but you don’t have to be turning over ten figures to purchase another business writes serial entrepreneur and investor Gez McGuire.

Why more SMES should be planning acquisitions as a route to growth

One of the strongest arguments for placing acquisitions at the heart of your business strategy is the ability to achieve rapid growth and personal gain in a way that would be impossible through day to day activity alone. For many, the right purchase could mean tripling or quadrupling the size of their business overnight.

Yet ask any small and medium sized business owners if they have an acquisition plan in place and the answer, more often than not, will be no. Not knowing how to approach a purchase is often one of the biggest obstacles.

So, what are the key steps businesses and individuals must take when looking to make a purchase?

  1. Funding for the future

The crux of this is that it’s about having a growth mindset. Often purchases can be made without the buyer having a large amount of money in the bank, with finance based on the assets of the new business, including bank balances and assets that are expected to convert into cash, such as stock and debtors i.e people that owe the business money, combined with strong financial forecasts. As an owner myself, I see acquisitions as the quickest, safest and most guaranteed way of growing, because one purchase could treble, or quadruple the size of my business.

  1. Avoid the obvious

Finding deals isn't as difficult as it sounds. Owners are always willing to discuss the potential value of their business - if approached in the right way. There are hundreds of businesses listed for sale online but approaching those that haven’t declared themselves up for sale can often prove to be the most fruitful. This is in part due to a commission-based brokerage process that has meant that many businesses are overvalued, with very few going through to completion.

  1. What to look for

In a good business, you're aiming to replace nothing other than the person who owns it. For example, in my sector, I'd be looking for a good stable retained client base with contracts in place and a strong management team.

  1. Understand the maths

Once the accounts are received its time to make a calculation based on the assets, debts, revenue and money owed. The valuation figure has to make sense, so it’s not too risky for the business, but the seller is comfortable with the price offered. As a guiding principle, you're often looking at three times the EBITDA (earnings before interest, tax, depreciation and amortization). Most deals will be structured, so as to have a closing figure followed by deferred payments over three to five years. A prudent seller will understand the calculations and how that figure has been arrived at.

  1. When to walk away

Key to the whole process is knowing when to walk away. The vast majority of businesses will never be sold. Often this is due to an unrealistic valuation. If the maths are there and the offer made is realistic and credible the negotiations tend to be focused on the structure of the deal, rather than any changes to the top-line figure. This could be improving the closing payment, with smaller deferred payments, or a lower closing payment and larger deferred payments, making the deal easier to finance. For the seller maintaining a share in the business will allow for greater profits over time. Even in cases where the offer is flatly refused, it’s worth leaving the door open to future negotiations, as often you will find that those same businesses come back to you in 12 months’ time.

  1. Securing the workforce

People are one of the most important assets of any business, particularly in the service sector. It’s crucial that employees are brought along with you. One of the ways of doing this is to create a Limited Liability Partnership (LLP). This gives employees greater ownership over the management of the business, providing protection for them as part of the new entity and also gives you the financial freedom to pay bonuses in recognition of their hard work.

There are of course additional considerations when purchasing a business, but central to the process is a strong network of financiers, an understanding of how best to approach businesses and structure deals and the ability to bring employees along with you.

All of this would of course mean nothing were I not willing to put money where my mouth is, which is why I’m actively looking for businesses within the creative sector and wider industries to purchase.

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