Manufacturers – What should you consider in your acquisition journey?

Are you ready?

When acquiring any business, to ensure success, there are a number of key factors that business owners need to consider before jumping in, including:

• Where is your business within its own life cycle?
• Have you conducted a full competitor analysis of your industry to understand your position within the market?
• How much capital are you willing to spend, and what options/combinations for financing your acquisition strategy have you considered, be it retained cash reserves, bank borrowing and/or private equity?
• Do you have adequate financial and human resources in place for any integration plans to succeed or to manage the acquired business if you envisage it will be operated on a standalone basis?
• Have you considered tax structuring and the impact of an acquisition on your existing tax profile? For example, could this result in accelerated tax cash outflows under the quarterly instalment regime or impact on ability to claim R&D relief under the SME scheme?
• Have you instructed suitable advisers that have the relevant experience of advising on acquisitions?
• Lawyers and accountants, including tax specialists, are critical in any acquisition, as well as the appointment of a dedicated individual (internal or external) to oversee the entire transaction on your behalf.

Finding the right target to acquire

Once you have considered these points, the next step is finding a target(s) that is right for your business. At this point, you need to consider:

Deal mechanics:

• Are the reported profits in the accounts the same as the underlying profitability of the business? And perhaps more critically what is the future, sustainable profitability?
• What will the deal structure look like? Are you buying shares or just the trade and assets?
• What is the value of the business you are buying?
• Will there be a vendor earnout provision, and what will it be based on?
• What is the predicted timeline?

Operational:

• How does the target business complement your business and how will it be integrated?
• How does the customer profile compare to your business?
• What does the supply chain look like?
• What will happen with the current management team and its employees?

Due diligence – do you really know what you’re buying?

You may think you know what you’re buying, but how do you know for sure? Financial and tax due diligence is critical to avoid any unpleasant surprises post-acquisition. The early identification of areas of concern and risk, together with recommendations and advice, is an essential part of the acquisition process. Your due diligence advisers can provide thorough analysis on the following key areas:

• Assessment of historical and current performance, including its Key Performance Indicators
• Quality and sustainability of underlying profits
• Quality of financial information, in particular in respect to income recognition and valuation of stock & work in progress accounting policies and are these consistently applied
• Customer or supplier dependencies
• Cash generation
• Ageing profile of the plant and machinery and assessment of financial indicators that imply level of future capex requirements
• Underlying net working capital requirements and level of free cash or debt to be added or deducted from the agreed Enterprise Value in determining what is paid to the selling shareholders
• Tax risks, including: capital allowances entitlement, excessive Research & Development claims, PAYE risk in relation to subcontractors and VAT exposures in respect to any imports or exports
• Robustness of the financial projections and how they compare to historical and current results (if available)

Post-acquisition: your 100-day plan to delivery

Ensuring a smooth integration immediately following completion is critical for maximising success of an acquisition and having a formal ‘100-day plan’ can greatly assist. So, what key items should form the framework of this 100-day plan?

• Setting out the team members responsible for different areas of the 100-day plan along with clear deliverables and timeframes
• Detailing how and when the key issues or opportunities from the due diligence findings are going to be actioned
• Employee onboarding (communication of what is happening and what is in it for them is critical to get across from day one)
• What is the vision – communication to all key stakeholders is critical here, primarily being the employees, the customers and the key suppliers
• Integrating systems, including aligning accounting policies for income recognition, stock & work in progress valuation

Ensuring Key Performance Indicators following the acquisition are monitored and acted upon and that cashflows, including tax cashflows, are carefully planned