News

Acquisitions in 2009 still need to create value

Richard Hayward
July 22nd, 2009

HHMC is finding that there is no shortage of companies looking for a “deal” this year and are hunting for the easy add-on business in a more down-beat market. In principle, nothing should change from the reasoning and decision process of other times.
It is essential that the reasons for embarking on an acquisition are understood and the target companies evaluated on the basis of the value they create for the buyer.

For privately owned companies, a growth-through-acquisition strategy can be a cost-effective and relatively quick approach for achieving key goals and objectives.

Although many owners and executives first consider this strategy only when they hear that a local competitor may be up for sale, other acquisition targets may exist that are actually a better fit.

So how do you identify and select appropriate acquisition targets?

Answering this question requires that you obtain an in-depth understanding of your business’ operations and marketplace, and clearly identify your goals for the future. This then provides the starting point for developing an acquisition strategy and an initial list of potential targets. This target list is then refined through ongoing research and analysis.

This process will help you identify specific targets that both meet your objectives and should meet the criteria of creating value for your company. The insights developed are also crucial because of the significant investment in capital, resources and emotion that acquisitions require.

Consider this: the wrong acquisition could create additional stress without creating income, significantly reduce your cash flow or even head you towards bankruptcy.

Clearly, it is a process that needs to be thought through before rushing headlong into a great “deal” that ultimately turns bad.
Here is a checklist for assessing acquisition goals and priorities:

  • Determine your company’s strengths and weaknesses. What are the weaknesses that could benefit from a target’s recruitment services, capacity, skilled employees, & management expertise? Conversely, what are your strengths that could create value in an acquired company?
  • Identify the trends in your sector and market. Who are your primary competitor, your clients, and what are their strengths and weaknesses? What key issues are affecting your sector, such as technology, cost realignments due to outsourcing, changing demographics or an increase in legal costs or statutory regulations?
  • Clarify your mid- and long-term strategies. What do you want the company to look like in three and five years – and beyond? Do you want to expand interstate or internationally? Are you interested in diversifying your client base or services? Do you intend to sell the business in a few years, or in 10?
  • Consider the pros and cons of an acquisition strategy. Based on your understanding of your company, market and goals reassess whether an acquisition strategy can potentially address your needs and create value for your company. What does it cost per client to build growth organically? Does an acquisition appear less expensive and easier?
  • Discuss with your bank/finance company the availability of finance for an acquisition and the costs involved. Are you able to take on this much debt, and is it sufficient?
  • Develop the specific acquisition strategy. Decide where acquisitions make sense in your corporate strategy. Create a preferred target profile based on what you’ve learned through your research and analysis. Begin establishing realistic pricing and deal structures and expected returns. Note that this may be subject to modification, but it should require only minor changes once you identify and research a specific target or targets.
  • Develop a Long-List of possible targets. Make an initial assessment of your interest in acquiring each company and how it adds value to your organisation. Then prioritise the list.

    • Through this process, you should gain a good handle on most of the targets that make sense to consider further. This list will continue to evolve, based on ongoing research and conversations, and as you move forward, you will develop a better feel for which targets are most likely to sell.

    Ultimately it will of course require appropriately contacting the targets, analysing their financial data and conducting direct negotiations to determine which companies are genuinely available for acquisition at a reasonable price. This is of course the part of the process that can be the most time-consuming, demanding and often frustrating. However, the more clearly you have defined your goals and pre-qualified the target businesses the more effective the process will be.

    You may choose to use a Business Advisor at this stage who understands both your industry and acquisition processes. Having gone through the stages of the above checklist will allow you to fully brief your Advisor on your business objectives and establish the parameters for the negotiations.

    Richard Hayward is a Principal of HHMC Australia, a specialist Merger & Acquisition consultancy focusing on the Recruitment Industry. Richard has an extensive background at senior levels in the Recruitment sector having worked with international, national and smaller local companies for over a decade before joining HHMC. His clients, as either buyers or sellers include companies ranging from blue collar industrial, ICT, banking & finance, accounting, business support, and operations recruiting businesses.

    This article was posted on Wednesday, July 22nd, 2009 at 10:50 am.