As with many small business owners, for much of my career, I’ve focused on organic growth as the route to achieving my financial aspirations.
Having launched my own events business in 2004 it wasn’t long before I was working with major brands including Suzuki and Microsoft. Seeing an early opportunity in the growth of search engines, I studied hard to become Google qualified, setting up a second business focused on digital advertising. Within 10 years I had become one of the top 5pc of Google-qualified specialists going on to work with hundreds of businesses, managing tens of millions of pounds worth of ad spend.
Hard work and dedication paid off, but it was both costly and time-consuming and there was a limit to what could be achieved through client acquisition alone.
To grow further I realised that I needed to explore other options.
What I’ve identified is a perfect storm of readily available capital and businesses ripe for sale. In short, buy another company.
Latest figures reveal that there are more than 113,000 directors over retirement age still running businesses. For business owners such as myself in their 30s, 40s and 50s, this presents a huge opportunity to grow, if only we can grasp it. For many, knowing where to start if you want to buy another company seems the biggest obstacle.
You don’t have to be cash rich to make a purchase
The crux of this is that it’s about having a growth mindset rather than the amount of money you have in the bank. Often purchases can be made without the buyer putting their hand in their own pocket, with finance based on the future revenue of the business. As an owner myself, I see acquisitions as the quickest, safest and most guaranteed way of growing my business, because one purchase could treble, or quadruple the size of my business.
Finding prospective businesses is easier than it sounds
Interestingly, finding the deals isn’t as difficult or as onerous as you would think. People are always willing to talk to you about the potential of selling their business if approached in the right way.
While there are websites out there with hundreds of businesses listed for sale, 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 means that many businesses are overvalued, with very few going through to completion.
What to look for
The smartest route is to look within your own sector initially. The directors you’re approaching understand why the conversation is happening, the growth strategy is clear and it’s easier to demonstrate mutual benefit.
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.
Keep it confidential
Having had the initial conversations and agreed that you’d like to take things further it’s time to enter into a non-disclosure agreement. This way you can get the information that you’ll need in order to make an offer, including the past three years’ accounts, without the current owners feeling like they’re giving away any trading secrets.
Understand the maths
Once the accounts are received, it’s 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 annual profits. 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.
When to negotiate and when to walk away
Key to the whole process is knowing when to persist and when to walk away. There is no shortage of businesses that are potentially up for sale. It’s worth remembering that 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 payment, 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.
Bring employees with you
People are one of the most important assets of any business, particularly in the service sector. When your core aim is growth you want to avoid buying a business that you then have to run, as a result, it’s crucial to bring the employees 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.
Keep it light touch
Growing through acquisition requires a light touch approach to the integration of the two entities. If the steps above have been followed, you’ll buy another company with a strong management team. Significant changes at this point can put business relationships at risk and alienate employees. It’s important to be both careful and pragmatic and this extends to what is publicly stated about the change in ownership. The ideal situation is that nothing changes about the purchased business other than the people who own it. Where it makes sense to shout about the purchase is when it opens up new service offerings to new and existing clients. Unless there is a strategic advantage in doing so, however, there is very little benefit in publicising a purchase.
There are of course additional considerations when you buy another company, but central to the process is a strong network of financiers and access to other investors in case you want to share an opportunity, an understanding of how best to approach businesses and structure deals and the ability to bring employees along with you.
Gez McGuire is serial entrepreneur and investor who owns a digital advertising business.