I am back from a week off in the Queensland sun. You can’t beat the spring climate in Queensland if you are a golfer, 28 degrees and minimal wind. In the private business arena all the indicators are pointing towards business confidence improving and I even read the other day that the Banks appetite for business risk is improving. Obviously I will believe the last point when I see more loans being approved, but it was nice to see it mentioned.

This week I thought it was time to update my 12th of May post on Growth by Acquisition. We are currently working with 3 business owners (and 2 in negotiations) who want to grow their business by acquiring other companies. This is not a generally accepted modus operandi for the NZ market but we believe it is becoming more and more attractive for strong performing businesses who wish to target specific companies or categories. As I alluded in the May post the Banks look very favourably on this type of transaction and with current market conditions your target business could be very favourably priced.

Instead of spelling out all the benefits I thought I would just show some of the motivations these companies are in this market space for:

1. Market share. The obvious reason for an acquisition is to grow market share.
2. Regional Coverage. A company we are dealing with which has excellent coverage in the Auckland market is looking to purchase market share in other regions by purchasing one of that markets players. The business, being a going concern, offers instant cash flow which wouldn’t be the case starting their own operation in that city.
3. Purchasing weaker competition. Most businesses carry out a ‘competitor analysis’ and know how their competitors are travelling in this market. If you are aware of some weakness now could be the chance to take that competitor out.
4. Expanding “brand” offerings. Brand driven companies generally have expensive infrastructure and the opportunity to add new brand opportunities to the existing capacity of the business adds little to the day to day costs of the business and more hits the bottom line.
5. Underutilised capacity. Companies like service providers really are only able to sell their time and any hours that their staff are idle are hours that are lost forever. A competitor acquisition allows an opportunity to fill that diary.
6. Offering more products to your existing clients. ( A natural extension to point 3 above) Another recent transaction we were involved in allowed an Import Distribution company to purchase two similar but non-competing brands from a competitor that were already being sold to their major customers. They had the warehouse space and were able to allocate the brands easily to their existing call cycles. Because they were already a significant player in the market and the brands were non-competing the assignment process with the overseas suppliers was simple.
7. Quality staff. A more and more regular occurrence these days is for a company to look at an acquisition as much for the sales as the staff that might come with the transaction.
8. Enter new but strategically aligned markets. We recently completed a transaction where Company A purchased Company B, they both were B2B service providers in similar but non related fields. After integration, Company A was able to offer their services to Company B’s customers and vice versa. So 1 + 1 then equals something above 2.
9. Accreditations, Leases, IP, systems etc. Some acquisitions also offer other tangible and intangible benefits over and above the Cashflow of the business. I remember one of the major motivators for McDonald’s purchase of Georgie Pie was the Greenlane site. There would be many other category specific intangibles here, which only parties operating in that field would know, but makes any opportunity more attractive.
10. Underutilised capital. We are currently working with a company that has cash in the Bank and nowhere to put it so they want to purchase another business to add to their stable. With the demise of the Finance companies and property yields being less attractive than in the previous markets, purchasing another business becomes almost the only option over bank deposits.

    There are definitely more benefits in an acquisition than just buying the sales. But there is definitely a process involved that needs to be followed for you to get the best deal you can and that starts with having a good Buyers Agent.

    If it is something that could be on your radar then come in for a coffee and we can have a chat.