Firms aiming to grow via acquisition need to look under the bonnet when considering who they should buy, warns Stephen Gazard - the bodywork might be beautiful but it could also be hiding a multitude of sins
When they decide to acquire another company, some firms will be planning to grow their business while others will be looking to add to their existing client offering. Whatever the motivation, however, it is crucial acquiring firms really look under the bonnet of the target business so that they fully understand any risks to which they are about to expose themselves.
Failing to complete adequate due-diligence on prospective targets, including on the advice process and the advisers employed, could see purchasers entangled in legacy issues that are not only costly, but also time-consuming to resolve. If these issues are severe enough, they can also be damaging to a purchasing firm's reputation if they come to light.
In some instances, these issues may have happened and been hidden - for example, if a firm ‘phoenixed'. Here, the firm may be operating under a different name, but still have a number of ongoing issues related to past business failures that have become embedded. Failing to ask the right questions and ensure there is certainty regarding any concerns could place the purchasing firm at risk.
Other issues can arise from a failure to conduct an appropriate level of research. As an example, an acquirer might discover the purchased company is worth less than believed prior to the deal, which can have serious consequences for the firm's long-term plans and objectives. It is therefore vital to have everything in place at the outset during pre-sale discussions to avoid wasting time on the purchase.
Of course, even the most experienced business people can find themselves faced with issues after buying. As a result, it is important to protect the reputation and manage the risk of expanding a business. So how can purchasing firms protect themselves from these pitfalls and ensure they really are buying what they think they are?
As a firm embarks on the due-diligence process, it is crucial the purchasing firms keep their brand and embedded culture at the forefront of their minds. The firm they are conducting due-diligence on may look good on paper - for example it might have good market visibility, decent revenue streams and be selling at what appears to be fair value.
And yet, if the prospective firm's culture and brand values do not align well with that of the purchasing firm, it may not be a good fit. Before agreeing to a deal, therefore, the purchasing firm needs to consider a range of factors.
These include what sort of client bank it will be acquiring and how this fits with the purchasing firm's current propositions; how the incoming staff will interact with existing personnel, including the values of these staff; and whether the target's IT solutions are going to be compatible with the purchasing firm's existing ones.
Ultimately, if the firm is not moving in the same direction as your own, it could create problems that may not be easily resolved.
Efficiency should be at the heart of the decision-making process. While a firm that is being sold can have what appear to be strong revenue channels, if there is a culture of burdensome administration, this can affect profitability as it is transitioned into the purchasing firm.
With this in mind, drilling down beneath the surface can reveal hidden anomalies in a business. If something appears to be cheap or too good to be true, you should be asking why and investigating this further.
This brings us on to the question of cost. Firms we speak to are coming under pressure to find additional streams of income and face increasing regulatory burdens with their associated costs. Understandably, it can be tempting for purchasing firms to save on the cost of a purchase by skimping on due-diligence - but this is generally a false economy.
Spending that little bit more now and ensuring you are entirely confident about the firm in question can really pay dividends later as it allows you to forecast potential areas of income and expenditure more accurately.
Buying a firm is a complex, time-consuming and costly activity so looking under the bonnet is essential. Unlike with a car, however, you cannot take a business to a garage to fix it if something goes wrong.
The purchasing firm may well be left with legacy issues that could have far wider ramifications for that firm. As such, it is vital any purchasing firm works hard at the outset to reduce any inherent risks and set the tone for future efficiency should the sale go ahead.
Stephen Gazard is managing director at Bankhall
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