Growth by acquisition

Growth by acquisition

Acquisitions can provide businesses with opportunities to grow faster than might be achievable organically, bringing together products and services, established customer bases, supply chains and personnel to build a stronger, more diversified, resilient operation.

Acquisitions can also remove a competitor from the market, gain scale to defend a market from a much larger competitor, or secure a market window of opportunity, for example by acquiring technology or knowhow.

In recent years, we have seen strong activity in acquisitions which are market consolidations, increasing turnover on top of an existing overhead base, bringing economies of scale and synergies, thereby increasing profitability. Reducing overheads as a percentage of turnover reduces the risk in a business by increasing headroom over the breakeven point.  Currently, with the impact of COVID on markets, we are seeing supply chain consolidation as a specific strategy for businesses to reduce some of the operational risk in access to product and/or customers, internalising profit in the process.

Sectors that have seen consolidation in recent years include professional and financial services, vets, healthcare, catering and facilities management which are all heavily reliant on people and where recruitment to facilitate growth can be challenging. 

However, a sector that may benefit most from consolidation is specialist manufacturing and engineering. SMEs are a significant proportion of the sector in Wales, and often have capacity constraints and potential inefficiency as a result of individual management structures and dependence on a small number of key individuals. Therefore, consolidation in this sector would bring together resources, skills and capacity and rationalise overheads, potentially increasing competitiveness and profitability.

A good acquiring business will have the following attributes:

• A management team with a strong vision and capacity to implement an integration;
• Cash and/or funding sufficient to complete the envisaged transaction without putting undue pressure on the underlying business; and
• Strong financial reporting systems to monitor performance.

Acquisitions can put pressure on the working capital and management of a business and therefore increase risk. The scale of the risk depends on the relative size of the acquisition, the structure of the transaction, the nature of the funding and whether it introduces a new activity or geography to the business.

Businesses that grow by acquisition often do so after a period of organic growth, as this is a less risky way of testing and understanding a market, developing the management team’s skills and using profits and cash, without incurring debt. This initial stage can enable management teams to identify opportunities and understand potential strategic benefits.

Advisors can support growth strategies, whether organic or through acquisition, by advising on valuation, sourcing funding, negotiating terms with the owners of the target, identifying benefits and risks, providing a commercial “critical friend” to the directors and project managing the process. This can enable the management team to continue to concentrate on the core business and ensure it is in the best shape to achieve profitable growth.

If you wish to discuss how we could assist you with acquisitions, please contact Katherine Broadhurst, Partner at Azets on 029 2054 9939 or Katherine.Broadhurst@azets.co.uk