How acquisitions can help your business grow

As the economy heads into a recession, it may be an opportune time to consider whether buying another business could help achieve your short- and long-term growth strategies.

Businesses face a growing number of challenges. Inflation is at a record high, which has a direct impact on costs and the disposable income of consumers.

Increasing sales and growing a business could therefore become more difficult in an environment where the focus has shifted to controlling costs. This may be an opportune time to consider whether buying another business could help achieve your short-term and long-term growth strategies.

Before we explore how acquisitions can add growth, we need an understanding of how the deal can be structured.

Common deal structures

Asset sale

This is where the acquirer purchases the revenue-generating assets of the business, typically stock and fixed assets (tangible assets). The acquirer usually pays more than the value of the assets. The additional amount is known as goodwill (accounted for as an intangible asset) and it represents the value of future cash flows generated by the business. With asset purchases you don’t assume the legal risk associated with purchasing the shares of a company. The tangible and intangible assets become part of the acquiring company – or a new company is incorporated to purchase the assets – and new legal contracts must be executed.

Share sale

The acquirer can purchase some or all of the shares in a company. That company still operates on a stand-alone basis with just a change in shareholding and potentially a change in the board of directors. The acquirer becomes responsible for the liabilities and legal risks associated with the company from the date of acquisition (or investment for a part-shareholding), therefore the acquirer is potentially exposed to more risk under this structure[TH1] .

The benefits:

Adding revenue streams – Acquisitions provide an opportunity to access the acquired business’s customer base. A key consideration is how easily you could service these customers post-acquisition. Take the time to assess the existing leadership team and key staff. They often have key customer relationships and need to be onboard with your strategy and management style to deliver effectively.

Access to new products, markets and services – Acquisitions also allow you to expand your footprint into new markets, products and services. Some points to consider if this is your strategy are:

• Is this new product, market or service well established or still in its infancy? If in its infancy, do I have enough resources to commit to achieve a return on investment?
• If this is unknown territory, what advice can I get to ensure that I manage the risks appropriately?
• Do we have the support of our leadership team to overcome any unforeseen risks and challenges?

Access to new technology –  Rather than invest a large amount of time and money in research and development, buying a new business means you can gain access to the technology already developed by the target business along with the intellectual property generated from these activities. Make sure there is a plan to monetise this technology.

How to buy a business

There are several established New Zealand business brokerages with databases of businesses to sell. You register your interest to purchase a business with the broker and they send you a non-disclosure agreement (NDA) to sign. After this is signed you may receive an Information Memorandum (IM), which contains key information about the business including financial statements.

After you review this information, you may wish to place an offer on the business, subject to due diligence. At a basic level, due diligence involves interviewing the seller and reviewing the books and records to understand the business. It is the equivalent of “looking under the hood” when buying a car. Most buyers typically conduct a financial due diligence exercise to understand financial performance and position. Legal due diligence is also done to uncover any potential legal exposure, and tax due diligence may be required in the case of a share acquisition.

Selecting the right advisor to assist with financial and tax due diligence can also help you to understand the potential risks and opportunities of purchasing the target business. Incorrect accounting, lack of formal contracts and the absence of robust systems and processes can provide leverage to negotiate a reduced purchase price. These savings frequently outweigh the cost of appointing an advisor.

Article by Asheel Bharos, associate director, Business Advisory Services, Baker Tilly Staples Rodway.