How to approach a business that you’d like to buy - Hilton Smythe

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How to approach a business that you’d like to buy

Thinking of acquiring a competitor? This guide explores how SMEs can successfully approach target companies. Learn about the importance of due diligence, defensible valuations, effective communication, and the role of business brokers. 

How to approach a business that you’d like to buy

EY’s latest CEO Outlook Pulse Survey shows businesses are engaging in M&A activity with renewed vigour, as they fight to stay relevant amidst growing industry consolidation and technological disruption.

However, while multi-billion pound corporations will have ample funds to splash out on M&A transaction advice from the “Big Four”, SMEs face a different path when acquiring competitors.

And securing top advisors isn’t the only hurdle SMEs face. Approaching a potential acquisition target requires a careful strategy, one that hinges on effective communication, an in-depth understanding of the business, and a financial assessment and valuation on which both parties can agree.

Being well-informed about your target company not only demonstrates sincerity of interest, it will also avoid uncovering any financial skeletons in the closet at a later date.

Even multi-billion dollar deals can fall foul of this advice: due diligence, for example, didn’t recognise the major problems that were to plague Sprint’s $35bn majority stake in Nextel Communications, including incompatible technology and clashing marketing strategies.

Ensure you understand the reason behind any major liabilities on the target company’s balance sheet, the company’s tangible and intangible assets, its staff, the cost of production, and its competitive standing in the market.

One of the most straightforward ways to ensure you understand the nitty-gritty is to approach businesses through a business broker. A reputable business broker will have prepared a comprehensive Information Memorandum on the target business, detailing the company’s main business activities, client base, staff, points of differentiation, assets, and financials.

A fair and defensible valuation, ideally established through an independent third party, sets the stage for amicable negotiations with the seller.

For example, a seasoned business broker, such as Hilton Smythe, can bring time-tested expertise to the valuation process. They’ve been exposed to a vast amount of historical and recent SME transaction data – which is crucial when employing a market approach to valuation, which involves calculating the average Income/Enterprise Value (EV) ratio of comparable businesses.

And their expertise goes beyond just data. Business brokers have a keen understanding of the broader market dynamics: they can interpret the average Income/EV ratio in context, considering industry trends, growth potential, and risk factors.

Indeed, company valuations can vary significantly depending on the ambient economic climate: in 2022 and 2023, for example, inflation and the higher cost of capital depressed average and median revenue multiples, creating large “expectation gaps” between founders and prospective buyers.

Keeping effective lines of communication open are crucial for keeping all parties in the loop.

However, before your target company reveals sensitive information like client lists, contracts, and intellectual property (IP), you’ll likely need to sign a non-disclosure agreement (NDA).

While a piece of paper cannot by itself prevent confidential information from being leaked, it does establish a set of guidelines for the prospective buyer to follow and gives the seller contractual remedies in case of breach.

An intermediary such as a business broker can help facilitate this process and control information access with NDAs and data rooms, ensuring a smooth exchange of information while protecting the seller’s confidentiality.

They can also organise site visits, oversee the formulation of Letters of Intent, and guide both parties through the due diligence process.

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