Kicking off our new Thought Leader section is Mike Robson who has 23 years strategic and operational experience both as an Executive and Non-Executive Director of a range of companies. He has successfully launched and sold his own company. Mike is a Chartered Accountant and an Independent Non-Executive Director of a company listed on the London Stock Exchange.
In 2004, Mike launched Azure Partners with 4 other successful business people, aiming to provide pragmatic help to companies, business owners and directors. In working alongside approximately 50 companies over 12 years the firm’s focus has been on the support that would have been helpful to the founders in their careers, including:
- Advising client boards on strategy and implementation – challenging the status quo;
- Chairing Boards – not ducking difficult issues;
- Identifying skill and other gaps in senior management and filling them through mentoring, promotion or hiring – expanding management capabilities;
- Identifying and dealing appropriately with Board or shareholder conflict;
- Acting as a sounding board for Executives – supporting and mentoring;
- Monitoring financial and operational performance – addressing underperformance;
- Evaluating acquisitions, ensuring non-financial due diligence is done appropriately and that there is an integration plan in place;
- Creating or evaluating marketing or sales strategies, monitoring their implementation and making adjustments as required.
How does your firm assist in a typical acquisition process? What are the key stages and complexities that are likely to arise?
Acquisitions can play an important role in expanding a firm’s geography or its technical and operational capabilities. They are also exciting. Most growing firms consider acquisition as part of their growth strategies. Despite fears surrounding Brexit, the merger and acquisition markets remain buoyant in most sectors and I am actively taking phone calls each day.
There have been numerous reports demonstrating that many, perhaps most, acquisitions do not deliver the value that is expected of them. I cut my teeth in business helping to unravel a £50 million acquisition made by a blue chip company in which the expected synergies and other benefits had simply not materialised. Treat acquisitions with extreme care and do invest the time to evaluate whether or not the investment will work for you. There are 5 key stages of varying complexity:
Key stage 1: Why and what type of business are we acquiring? For many companies the profile of their acquisition targets this will drop out of their strategic planning exercise. This stage is perhaps more complicated than you might think: Acquisitions that only grow revenue, market share or capacity often do not work well and organic growth leads to better results. Valid reasons for acquisitions tend to include:
- Gaining a new product or technology
- Gaining expertise (provided you can keep it)
- Gaining access to new sectors or geography
- Gaining significant cost savings
Key stage 2: Finding a possible acquisition. There are many organisations who can help identify possible acquisitions based on the target profiles from stage 1. In the internet age a significant amount of this work can be done internally and it may be the case that you already know of the potential acquiree. This stage can be time-consuming but is relatively easy.
Key stage 3: Blue sky planning – How can we make 1+1=3? Given what we know about the possible acquisition, how might we successfully combine it with our operations to develop a more profitable and sustainable business than the one we currently have? This stage can be fun but is in reality more complex than many people think and it is not just about the numbers.
Why and how are your customers and the acquisitions customers going to be better served after the acquisition – will they welcome it? Do you market and sell your products in compatible ways? Are the culture, work dynamics, remuneration practices and management styles sufficiently similar? Do they view innovation as you do? Is their vision, strategy and attitude to risk in line with yours? Where the answer to these questions is “no”, what will you do to manage the difference?
You are unlikely to be able to answer all of these questions remotely but this stage can stop you wasting time on acquisitions that will not work and will provide valuable input to the negotiation and due diligence stages.
Key stage 4: Negotiation. You can usually tell fairly early in the negotiations how genuinely interested an acquisition target is in your approach. Although sometimes time consuming this stage is as much about personal skills rather than hard work. Asking the right questions and listening carefully to the answers (including what is not said) is key to developing a deal that will work for you both. Completing stage 3 fully and efficiently helps to reach a deal both sides understand and can commit to. It reduces the risk of unpleasant post transaction problems.
Key stage 5: Post deal due diligence and integration plan. In our experience financial and legal due diligence can be complex but is usually done fairly well by lawyers and accountants. By its nature this type of due diligence is backward looking. What is done less well, or not at all, is to work out how the two businesses will work together in the future to create rather than destroy value for the acquirer.
As outlined in stage 3 above, compatibility of strategies, marketing propositions, sales methodologies, culture, work ethic, management styles, innovation processes, remuneration practices and many more need to be carefully assessed.
If you are serious about making the acquisition work both side should be keen to develop, using the results of the above assessments, an integration plan that will result in the two businesses working well together. If you are not happy with the results or the commitment and ability of the two companies to implement it, change it or politely terminate the deal. Never be afraid to break off a bad acquisition, however exciting it may appear on the surface and however much pressure you may be under to complete it
Acquisitions are time consuming and can be stressful, particularly if you are closely involved in running the acquirer. Azure partners regularly help with stages 1, 3, and 5 above and can help with stage 4 where required.
What key considerations must be looked at in order to successfully bring a company to market?
We examined above the approach an acquirer might take in buying your business. Part of the skill in selling a business is to understand the potential of your business in the hands of a range of acquirers, to extrapolate from that the value of your business to them and to negotiate the best outcome for your shareholders. In a genuinely strategic sale, this is likely to be higher than the value of the business to you – possibly significantly higher – once the acquirer combines their capabilities with yours.
The act of selling a business is a skilled, complex and time consuming activity. It can be made easier if, in the years before sale, you focus on developing the value creators and minimising the value destroyers listed below. In generic terms, the “Value creators” that are likely to make your business more valuable often include:
- The size and trajectory of your sector
- The scope to replicate your business in other sectors or geographies
- The effectiveness of your competitive differentiators
- The ability of the second tier of management to drive the business forward without you
- The quality and trajectory of your revenue and profit streams
- Commercially viable and exclusive intellectual property
- The extent to which your business is process driven and not reliant on individuals
Value destroyers to be mitigated where possible include:
- Product development with high technical or commercial risk
- Success based on large contracts with a small number of customers
- Heavy reliance on one product or service in a changeable market
- Success dependent on the departing shareholders or a small number of others
- Presence in a low margin and highly competitive sector
- Unresolved issues with customers, staff, regulators etc.
The lists of potential value creators and destroyers above have been extracted from Azure Partners’ book “Maximising the value of your business on sale”. Selling my own business was the largest and most complex business transaction of my life and had a significant impact on my financial standing. The same is true of all but a few of the owners we have helped to exit over the past decade. The book is designed to help to focus you on the primary issues. For a free copy simply phone or email me using the contact details provided.