intends to manage the business from its existing head office - in which case, good communication links are essential. Overseas expansion requires detailed local knowledge and brings additional challenges, particularly in managing the target.
Funding
For the buyer, a significant factor is the method of funding. Bank funding will come with strings attached, chiefly around cash flow covenants. Equity funding, such as through private equity, will have even more stringent return requirements.
Using an adviser
A financial adviser provides a useful buffer between the target and buyer, adding real value to the process and helping to ensure that good relations are maintained between the buyer and the seller. Before you decide to go it alone, remember that the adviser is familiar with this world; acquirers are often not.
The pricing conundrum
Pricing is not an exact science and although a rational argument can be made to justify a price, it always comes down to negotiation. An acquisition should not be made simply because it is cheap, but because it makes sense.
Common methods of valuation include: net asset value; entry costs versus cost of acquisition; discounted cash flow; price/earnings ratio; turnover ratio; and synergistic savings.
In many ways, each method of valuation is a cross check and should not be relied upon on its own. The key value is what the business is worth to the buyer rather than what the seller wants to sell it for.
To sum up
Acquisitions mustn’t be left to chance - a good acquisition is not simply a cheap one. By setting clear acquisition criteria, using the support available and applying skilful negotiation, businesses can find the right match. But this is just the beginning of the acquisition process. Ultimately, it is the commercial and cultural fit that will determine the outcome long after the acquisition is complete.
Brian Livingston, Director, Head of Mergers & Acquisitions
Tel: +44 (0) 207 131 4914 e-mail:
brian.livingston@
smith.williamson.co.uk
Brian Livingston is a corporate finance specialist with in excess of 20 years experience and over 100 transactions under his belt. He focuses on institutionally backed and owner managed businesses where his understanding of key value drivers and processes underpin his transactional expertise. The vast majority of Brian’s transactions have involved buying from or selling to the private equity community, where he is known for his straightforward and practical approach. He has also completed a significant number of fund raisings, assisting entrepreneurial and growth businesses with their ‘buy and build’ strategies and leading them through successful exits.
Brian cut his teeth at private equity giants 3i, where he spent 13 years, prior to joining Smith & Williamson in 2003. He now heads up Smith and Williamson’s Mergers & Acquisitions team and is based in the London office.
24 entrepreneurcountry
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