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Finding the right match28th of June 2012
In light of recent mergers in the cleaning and FM industries, James Metzger of Metzger Business Search offers advice on how to find the best strategic match when acquiring a business.
Most companies considering an acquisition do so to complement the organic growth of their own business. Acquisitions can provide companies with added skills and capabilities which enable them to service existing clients better and help win new contracts in a tough market.
Growing your business organically is difficult in the current economic climate. It’s important to protect your existing customer and contract base, even before you start trying to secure new ones. Broadening your customer base through the right acquisition can provide a great growth opportunity. Your target business may have distribution channels and systems which you can use to promote your own services. Better production or distribution facilities are often less expensive to buy than to build.
As Europe faces a tough economic climate, a buyer with cash is going to be negotiating from a rare position of strength. Absorbing the competition may also be a good reason for acquiring another business.
Geographic reasons are a further factor for acquisition. A northern European company may want to obtain a UK base or a company based in the UK Midlands may want to acquire one based in the south east.
Companies might want to win more of the same type of business such as cleaning contracts in the same region, or in a different region. If you’re struggling with regional or national growth it may well be less expensive to buy an existing business than expand internally.
You may want to expand into new sectors. For instance, if you’re a cleaning company which is heavily involved in local authority work, you may wish to diversify into another sector such as contracts within the leisure industry to ensure you are not too dependent on one or two major customers. A daily office cleaning business may want to get into washroom services.
A cleaning company may want to diversify into another soft service so it can offer clients a multi-service capability. A prime recent example is contract catering group Compass UK and Ireland buying cleaning firm, Integrated Cleaning Management (ICM).
A recent acquisition in the facilities management sector which my company helped facilitate, was Servest Multi Service Group acquiring Turners Cleaning and Support Services which gives the organisation access to new sectors, widening the customer range.
The reason for an acquisition might be opportunistic. For example, we supported a cleaning company that was tendering for contracts where it had an opportunity to provide the security services for the same site. They found a suitable company, with the right strategic fit and won contracts as a result.
You may want to buy a company because it has a strong management team. Obtaining quality staff with good management can be beneficial to your own business. Perhaps you are nearing retirement as manager of your company and want a suitable team to succeed you and take the business forward.
Be clear about what you expect from the deal. Buying simply because a company becomes available is a recipe for failure. Any merger or acquisition must be consistent with the strategic direction of the business. You need to know what you want to achieve and which type of company is going to help you meet this strategy. Keep the original strategic goal in mind throughout the acquisition process and avoid being side-tracked.
For instance, what size company are you looking for – one half the size of yours or a quarter? Can you realistically afford to buy the type of company you are considering buying? And can you find the funding? Once you have assessed your own business and its finances, you should be confident the deal produces a higher return than investing the same amount of money internally or, if not, that other factors justify the deal.
You also need to consider whether stakeholders such as your shareholders, employees and trade union representatives will support the proposed merger. When stakeholders know their views are listened to seriously this will contribute to the development of a consensual transition plan.
Always consider the criteria of the type of business you are looking to buy including industry sector, product portfolio, turnover and location.
Finding the right company that meets your criteria isn’t easy, which is where a business search specialist can help. There are five benefits of outsourcing the acquisition process:
Time to find the right company
Finding the right company involves detailed background research. If companies try to do the job internally, who will do this? Usually the task would be given to the finance director who may have to drop other important tasks. The search for a suitable organisation is a task they will have to pick up and put down again as other business critical tasks may take priority. Finding a suitable target isn’t a project they will able to give their full attention to and they may not have the time or the right deal making skills to drive an acquisition forward.
Businesses may prefer not to disclose to their competitors, the stock market or a number of other stakeholders that they are seeking an acquisition in a particular field. Only once there are clear signs regarding possible fit and a genuine preparedness to sell might they feel comfortable having their name made public. By using a specialist business search agency, discretion and confidentiality is maintained during the qualifying process, when evaluating the credibility and viability of each target.
Using a specialist agency, managed by experienced business and financial experts who understand the sector and business relationships is key. Finding the right company involves a detailed qualification process. Firstly, is the company you have on your target list actually for sale? If so, do the owners intend to remain involved in the business and what are their motives for selling?
Is what you think you have already discovered about the company actually correct? What more can you find out about the management team and the financial strength of the company? What type of reputation does the company have?
Another important aspect of the acquisition process is analysing whether the company you would like to acquire has a proper management structure. Are they serious about going into business with you and would they fit in with your corporate culture or walk out of the door? How will management, on both sides, get on post-merger? Who on your own team might be likely to leave and would the vendors want to stay on? Consider whether you could work well with the target company’s managers and staff as personality differences often lead to mergers failing.
Understanding the financials is also important. Not just sales and margins but also the cash position of the company you are looking to acquire? Does it have cash on the balance sheet or is it in debt? Does it generate or consume cash from its normal operations?
Getting to the right people
The process is not as easy as mass mailing a wide selection of companies gleaned from the web. As we all know, business people get a lot of junk mail, which is usually binned, so getting through to the right people with the right message is vital. We need to be sufficiently confident, trusted and plausible to get through to the owner and strike a meaningful dialogue. This requires an unusual breadth of experience and empathy. It’s important that the target business understands why you are interested in a deal and how you intend to finance it. Transparency is an important precondition for establishing a relationship of trust.
Finding businesses not for sale
Experts who understand the sector have a strong network of contacts and can relate to owners will be able to uncover organisations that might not have initially been thinking about selling their business at the current time. With this knowledge, a deal may be secured before the company comes onto the marketplace. At the moment mergers are moving quickly, so getting to the right organisation fast is vital.