Purchasing the best of both: a guide to M&As
Wednesday, January 23, 2013
Acquisitions have a murky reputation, as we have all seen too many pre-pack administrations to feel at ease with the subject. Do it well, though, and merging with another firm could be your best move yet
Due to the prevalence of pre-pack administration deals in print, acquisitions have a slightly tainted reputation. This is a shame, because mergers and acquisitions can be an incredibly beneficial business decision for both seller and buyer.
"It was the right deal at the right time for us," says Paul Calland, whose Cypher Digital business was merged into H&H Reeds Printers in the first half of last year. "The benefits of the deal have been numerous and it has really been a very positive experience for us."
Buying a business can bring in new services, expand capacity or add a new dimension or skills to a business, whereas selling or merging a business can see owners cash in on their hard work, safeguard the business for the future and enable further growth.
Calland concedes, however, that it can be intimidating to sell or merge with a larger company. For the buyer, it can also be a daunting process. Hence, PrintWeek has decided to attempt to demystify the M&A process by talking to two of the leading experts in this field: Richmond Capital Partners chief executive Paul Holohan and DD Consulting partner Danny Davies. David Bunker, business development director at Close Brothers Asset Finance, also gives the benefit of his personal views.
From the seller’s side
As a seller, early preparation is crucial to achieving the best price for the business, according to Holohan.
"All the research indicates that you get a better price if you have planned ahead and have been preparing the business two or three years prior to sale," he explains.
This means getting your house in order: ensuring the books are all up to date and that you have all your primary documents ready. This includes tenancy documents, lease agreements, deeds, mortgages, overdraft arrangements and hire-purchase agreements.
Davies adds that scaling down investment programmes can also help to ensure the business has a healthy profit going into any valuation. Typically, you should look in the last years of the books. Holohan agrees – to an extent.
"You need to make sensible decisions about investments in that pre-sale period," he says. "If there is a good business case for investing in equipment with the right calculations done on payback, you should still do it. But if you go and spend big at an exhibition because you like the look of something – well, that can be very damaging for a sale."
In terms of finding a buyer, it may be that people will come to you, but if not, you will have to find them. Specialist companies will seek out prospective purchasers on your behalf, keeping your name out of it to ensure confidentiality (being known to be on the market can reduce the value of the business). Holohan stresses that you should ask for and check references from these companies to ensue they have a track record of discreet and efficient work.
Once a buyer has been found, you then get to the valuation stage (see below). Once both parties agree a price, you enter the period of due
"As the seller, you have to be honest, but you only have to give up as much information as the buyer directly asks for," says Davies. "It’s a delicate balancing act. Think of it like selling a house. If no-one asks you if there is dry rot, you certainly would not tell them."
If you are asked directly, however, you do need to reply honestly.
"In English Law, you have a Warranty Claim," says Holohan. "If someone asks if your building ever floods, and you say no, and then a year down the line it does, they would almost certainly be successful in a claim against you."
Holohan does say you have to be careful when you give out the information, however. He explains that due diligence consists of three areas: financial, legal and commercial. He says you should not give up the commercial information – client lists, pricing and suchlike – until the legal and financial elements have been completed.
"By this stage, the buyer would have spent a lot of money. If they just wanted your client list, it would be an extremely high price to pay for it," he says.
If due diligence is all in order, the sale can progress. Typically, a seller will not get the full value for the sale straight away. The normal procedure is that part of the payment will be made in cash up front. Another proportion will be spread over time (generally a year), paid as a standing order. The third element is generally an ‘earn-out’: a percentage of revenue or profit paid out over a set period of time.
One thing to bear in mind is that a seller will typically be required to stay on for a transition period. This is particularly the case with small businesses where the owner is an integral part of operations. These transition periods typically last a year, but can run to three years.
Valuing a company
"Valuing a business is incredibly complex. People have written books on the issue," says Holohan. Indeed, there are a number of ways of valuing a company.
"My preferred method is the income method," explains Bunker. "The income approach to business valuation uses the economic principle of expectation to determine the value of a business. To do so estimates the future returns the business owners can expect to receive from the subject business. These returns are then matched against the risk associated with receiving them fully and on time."
Holohan favours a different take. "Net assets tend to be used currently – the balancing figure on the balance sheet – together with a premium for goodwill if the business is profitable."
Whichever method is chosen, there is likely to be a difference in what the buyer is willing to pay and what the seller is willing to sell for, as with any transaction. Hence, compromise and negotiation are key. Specialist consultants or companies are often a good conduit for seeking agreement.
From the buyer’s side
"In seeking out a business to buy, you are looking for ways to create value for yourself from hard synergies [cost savings] and the ability to increase the opportunities for your business," says Close Brothers’ Bunker.
With this in mind, targeting a business to buy should be a long and well-researched process. There are specialist companies that can be hired to seek out a business. But if you are looking to expand within your existing sector, Davies believes you are better off making the enquiries yourself.
"The specialist firms tend to be very expensive," says Davies. "It is often better to handle the initial stages yourself. Quite often with smaller businesses, the legacy of the business name is incredibly important. Going in and explaining your vision personally for that company can really prove invaluable. A seller may be willing to take a lower price if they know the brand that they have built up is going to be maintained properly."
He adds that before you make an offer, you have to assess the costs of the integration of that business planning five to 10 years ahead: "That way, you will ensure you have a realistic appraisal of the opportunity and the proper value of it."
As for whether that company will be receptive to your offer: there is often no harm asking if you are discreet (sending a letter to the owner, say, or not ringing the switchboard). There are also ways of taking an educated guess. Holohan says public information such as accounts or the age of the owner can be indications of whether the company would be receptive to a sale (the owner being of an age where he may be looking to exit the business.)
Once that company indicates it would be willing to discuss a deal, the issue of valuation has to be decided (see above).
With that agreed, you then enter the due diligence period. Here, you need to find out as much as you possibly can about the process and Davies recommends you ask for everything in writing. Asking the right questions is crucial as, under English law, the onus falls onto the buyer to request the information, not the seller to divulge it.
Holohan says the legal and financial checks have to be done extremely thoroughly. "If you are buying the shares of a business, for example, you are taking on the tax liability, so if something has been done badly in tax terms in the past few years, you will be liable if you buy the shares. You need to check for that. A good accountant is crucial."
There is no fixed rule for how long due diligence should take, but three weeks is thought to be the minimum. Something to bear in mind is that exclusivity of a deal generally only lasts for six weeks, so taking longer than that means other buyers could potentially jump in on the sale.
Once due diligence is completed, you are ready to buy. As outlined above in the seller section, look at methods of payment for completing the deal, in addition to keeping staff on fixed contracts for the transition period.
By making the M&A process clearer, the potential benefits of a sale or acquisition can be seen without the stigma of failed companies or the fear of the process itself. For many, M&A is the best route for a company to progress, on both sides of the deal, and so having an unbiased view is crucial for the industry as a whole.
To read the view of Paul Calland, who took Cypher Digital through a merger last year, see the online version of this feature.
TOP TIPS FOR INTEGRATING AN ACQUIRED OR MERGED BUSINESS
Danny Davis, partner at DD Consulting, is an expert in post M&A business integration and author of M&A Integration: How To Do It. Here he gives a taster of the latter, with five tips to seamless integration of an acquired or merged business.
- Plan Go fast - get synergies sooner with early planning so you can reap more benefits and thus reduce people’s uncertainly. Create an integration checklist and 100-day plan
- Level How far to integrate is a key strategic question. Do you go as far as just front office (sales and marketing) or into the back office too (HR, IT, finance) and then across all workstreams, functions and business units?
- HR People are your most valuable asset - sort out the top team early and ensure you know who is important and who you need to keep (at every level)
- Communications People want to know about their positions – ‘Do I have a job?’ Anything else you tell them is just noise. They are not interested until they are settled. Ensure all communications plans in all areas internally and externally are tied together
- Defining success You decide what defines success. Tell people and then hit those metrics you set