I have blogged in the past on the methods used to identify suitable SME businesses. I spoke last week about ways of identifying acquisition targets for companies, and now I will focus my attention on individuals who would prefer to invest in – rather than buy – a business. These individuals are generally referred to as ‘Business Angels’, a more sanguine term than ‘Dragons’. The general approach taken by such investors is somewhere between the two.

Investment in SME businesses

There are two main options for an investor – do you invest in a syndicated / pooled fund, or do you go it alone? 

A fund will make a series of regular investments, co-ordinating Due Diligence and other issues. The distinct advantage is that costs are pooled, and the syndicate will have well connected and experienced management. The latter carries more risks, but for the canny entrepreneur it can also generate greater rewards. The investor has increased autonomy, and can directly influence the day to day running of an investee company.

* Syndicated investment opportunities

There are several syndicates in the UK. The main private investment networks I am aware of are :

• Beer & Partners - www.investmentforgrowth.co.uk/opportunities.php. Network of around 1,700 private investors.
• Hot Bed –Slightly different model – see www.hotbed.uk.com
• CSS partners www.csspartners.co.uk/index.html Advisory firm – will align their interests with yours

There are many others – just enter something like ‘private investment network’ in Google or look at the British Business Angels Association www.bbaa.org.uk which covers some of the networks.

* Individual investments

The internet also provides many opportunities for private investors looking to go it alone. This takes a lot more effort by the investor, and as such opportunities are less ‘polished’ than those presented by the private networks mentioned above. 

Sites such as www.angelnews.co.uk any others through Google are a good starting point.

Before taking any investment decision, is important to take the appropriate advice, by an individual or body regulated by the FSA. It is also important that sufficient ‘Due Diligence’ is performed on prospective investments to ensure that representations made are factually correct.

Good luck!

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I read a very interesting article in today’s FT regarding buyers compromising on the quality of Due Diligence. 

The article illustrates the short cuts taken in the Due Diligence process.  Large deals took only 80 days to complete in 2008, down from 142 in previous years (according to Towers Perrin).

Whilst the article focuses on the bigger M&A transactions, the principal is the same for buying any SME business. Reducing the level of scrutiny into a prospective purchase carries enormous risks – the article refers to the infamous ABN Amro acquisition as ‘one of the most value-destroying deals of all time’. 

Due Diligence is the unglamorous relative of corporate finance. It is a methodical process that starts with an assessment of the key risks on which the assumptions of a businesses value are based. It then runs through a series of checks, reviews and analysis. The outcome from Due Diligence should provide a buyer with comfort, and if not, should be a solid resource for renegotiating the price.

Perhaps the days of limited access online data rooms – with terms dictated by the seller – are nearing an end? It is safe to say that 2009 is a buyers market, and the basis on which deals are struck will change.

Those with capital, and the guts, will come across some bargains in the current climate. However a short term saving on Due Diligence costs, can lead to many years of problems for a buyer. As Lina Saigol’s article states ‘the due diligence process … is critical to mergers and acquisitions and one that should be intensified, not diminished, during times of crisis.’

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With depressed asset prices, across all classes, traditional investment policies are being questioned. Cash? Interest rates are at an all time low, and are expected to decrease. The stock market? Not exactly a safe haven – too volatile and prone to the irrational movements caused by agitated city investors. Property? Possibly, but who knows where that will end up…? 

A number of people are now looking at investment in private companies. Why? In my experience people traditionally invest in small businesses for one or more of the following reasons:

• Many investors are entrepreneurs, who have run their own successful companies. This makes you aware of the issues – financial, commercial and otherwise that businesses face in this sector.
• Small companies are transparent. They can be ‘touched and felt’ and are not a ‘black box’ like their stock market relatives. Even a minority investor in an SME company can help manage and influence the future of the business.
• Investment in private companies has distinct tax advantages – some will qualify for the Enterprise Investment Scheme, in which HMRC will reduce the income tax liability of the individual for 20% of the investment value, offer capital gains tax / other advantages (subject to conditions). There are also Inheritance Tax reliefs for shares in private companies. 
• Involvement at these private rounds of financing often offers the highest risk/return on investment

I have been asked by clients on a number of occasions where to look for investment / acquisition opportunities in small companies. I will return to this in a blog, later this week or early next week.

It is important to obtain proper investment advice, by an individual or body regulated by the FSA – please speak to one our colleagues at Nightingale Associates if you would like any such advice. It is also important that sufficient ‘Due Diligence’ is performed on prospective investments to ensure that representations made are factually correct.

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As the uncertainty in our economy continues, there are still many who perceive that asset prices (in a number of classes) are undervalued. There are many SME businesses which fall into this category – but to the naïve, or badly advised, buyer, the process is fraught with danger which can erode the value of an acquisition. I have frequently mentioned M&H’s previous acquisition successes, and very few advisors are in the unique position of having risked their money and accomplished their growth goals.

In the final part of this trail of blogs, our hypothetical acquisition had just got through a rigorous due diligence process. If a deal is still on the table at this point - you should be able to move quickly to completion.

You should have been planning how to integrate the business months ago. Hopefully your plans are now finalised and they can soon be put into action. Even if the acquisition will run as a stand alone unit, time still needs to be dedicated by senior management, otherwise the company could lack sufficient control in the future.

The completion meeting may be a reason to celebrate, but watch out – the real work is about to start…..

Please see our website (http://www.mercerhole.co.uk/services/overview/C24) for more details on the acquisition process.

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I have blogged in the past on Mercer & Hole's achievements in making acquisitions. We have acquired whole departments from international accounting firms, and have successfully integrated these staff and their clients into our ethos of ‘Big firm expertise with a personal service’. There are many risks involved in buying a company, and the likelihood of failure is surprisingly high.

In my last blog a week or so ago, I had taken our hypothetical acquisition to an offer being accepted. At this point, the action intensifies. Accountants are appointed to undertake Financial Due Diligence and Lawyers for the Legal Due Diligence. In some deals you may also need commercial, pensions, environmental and IT Diligence. 

I always recommend that a key member(s) of the acquirers internal management are heavily involved in commercial and operational issues with the vendor - external advisers should not be trusted with everything, and the more involved you are, the easier it is for decisions to be made quickly as the deal progresses.

Once the results of Due Diligence are collated, another round of negotiations / horse trading commences. There is still a ‘not in-significant’ likelihood that a deal will fail at this point, particularly if unexpected problems have been found - the seller could have been given unrealistic expectations and may not compromise on the price.

Good Due Diligence is crucial to protect your interests - in simple terms it tests the assumptions the buyer has made regarding the acquisition. I have yet to be involved in a deal where it does not identify an issue of relevance. A good accountant and lawyer are worth their weight in gold!

Please see our website (http://www.mercerhole.co.uk/services/overview/C24) for more details on the acquisition process.

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In my recent posts, I have been talking about how an acquirer can maximise their return on investment by avoiding the standard pitfalls in a deal. I have mentioned the experiences of Mercer & Hole in making acquisitions, and how we have ultimately succeeded by aiming at niche businesses, realistic negotiating and by integrating into the existing M&H ethos. 

We had reached the point in our hypothetical deal where the seller had provided enough information to make an offer.

It is important to invest significant time in the offer itself. The key issue is obviously the valuation - there are a number of ways to approach this - profit multiples, discounted cash flows etc (far too much for this blog). 

It is almost as important to ensure the other terms are in your favour - earn out agreements, working capital levels, vendor service agreements and warranties. A crucial issue I come across time and time again are the conditions attached to the offer - if sufficient conditions are not included with the offer, it may hinder price negotiations after due diligence. It is not easy to predict what the diligence will identify, but with a bit of thought the key risks can be covered. 

Most sellers will attempt to renegotiate the terms of the offer - most good business people should be well used to bartering / haggling at this point. In the words of the father of modern economics: 

"The propensity to truck, barter and exchange one thing for another is common to all men, and to be found in no other race of animals."

Adam Smith (Scottish philosopher and economist) 

I will cover the final stages shortly. 

Please see our website (http://www.mercerhole.co.uk/services/overview/C24) for more details on the acquisition process.

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In my previous blog I mentioned the failure of the majority of acquisitions to generate a return for the buyer. Buying a company is a different process to anything else you have experienced. The wrong move at the wrong time will cost the deal – even the right move at the wrong time could cost ‘hundreds-of-thousands’ of lost value.  

I finished the last posting at the point where a search for acquisition targets had commenced. The typical acquisition targets are competitors, suppliers and even customers. Businesses in parallel markets should also be considered - for example an accounting practice could acquire a financial advisor. 

If we are offered a business at what is ostensibly a bargain price - we will not need to perform a wide search, but we should still test the market. Are business within the sector being sold at similar prices, is this really a bargain?

Lets now presume that a suitable business has been found. What information do we now request? At this stage the seller will be reluctant to provide too much detail - some recent P&L's, with details of any exceptional revenue / costs and the remuneration extracted by the sellers should suffice. 

In order to make a serious offer for the business - it is standard practice to hold detailed discussions with the sellers, and extend this to key management if appropriate. The seller is still likely to be reticent about certain sensitive information, but some level of detail can be provided including customers, suppliers, contracts and management. 

At this stage we are still a way off Due Diligence – only then will full disclosures be made – as illustrated by the recent transfer saga of Kaka / Man City reported in two our national papers – The Independent and The Guardian.  

I will return to the Diligence stage soon. 

Please see our website (http://www.mercerhole.co.uk/services/overview/C24) for more details on the acquisition process.

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Mercer & Hole have an inside track on making acquisitions work - our partners have the direct experience of spending their own hard earned money. We have acquired several businesses including smaller practices and whole departments from one of the international accounting firms. We have made this a success by applying our long standing philosophy – ‘Big firm expertise, with a personal service’. 

Many experienced and successful entrepreneurs can find the acquisition process difficult – quick judgements need to be made throughout the process and for the inexperienced it is easy to make well meaning but poor decisions. There is a frequently quoted statistic that 80% of acquisitions fail to add value. My experience is that this figure does not reflect the SME sector – the vast majority of deals I have seen are beneficial for the buyer. Despite the reduced relevance for SME’s, the statistic does make us aware that caution should be exercised. 

The first questions to consider is whether an acquisition strategy is appropriate in the first place. The buyer must keep asking “why am I doing this?”. Would it be more cost effective to pursue organic growth? Even if a company you are familiar with, is offered at a bargain price, you should consider what value it will add. Look at yourself and inside your business - do you have the necessary capabilities - management time, systems / accounting capacity and (of course) funding? If an acquisition can not be controlled after completion, it will be a huge drain on time, resources and profits. It also crucial to consider the state of the sector and the wider economy. Is the sector growing / contracting? What economic / political / cultural policies will have an affect?  

Once a decision has been made to adopt an acquisition strategy, the second key area is where to search. I will return to this at a later date - and will answer the frequently asked question "how do I buy a company" 

Please see our website (http://www.mercerhole.co.uk/services/overview/C24) for more details on the acquisition process.

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