Common mistakes firms make with M&A

Clive Stanley of Warwickshire-based M&A advisors, Acqius, on what entrepreneurs constantly get wrong
Clive Stanley
M&A deal is agreed

For many business owners, selling and buying is a once in a life-time event – certainly possibly the most fiscally significant event in their careers. Others, of course, have been through the process several times and may be able to approach it more confidently. But, whatever your experience, it’s vital to be aware of the errors all too many companies make around M&A and what you should do instead.

When choosing a broker, more doesn’t always mean better

M&A brokers are often viewed like estate agents, often with similar repute. There are different types available with different business models and skill sets, so it is imperative that the owner finds one suitable for his or her business. One that will strive to maximise the value for the business and focus on achieving the objectives of the owner.

It’s not necessarily the right decision to go with a broker that states how many deals they do per year. The important statistic is how many businesses they engage and how many of those they sold against the predetermined parameters. Having many businesses for sale is often thought to be a factor of potential success, but it isn’t necessarily.

Don’t lose control of costs

It is imperative that the advisor and the business owner have a mutual understanding of what is potentially financially achievable from a sale and the likely timescale of the sale process. This is particularly true if they are paying interim funds to an advisor pre-sale. For a business owner, it’s wise to understand what costs will have been faced if a sale fails to go through, as well as a grasp of all the fees payable when it does.

Be realistic about valuation

Business valuation is very individual. The obvious fundamentals of a good business in a declining market versus a less healthy business in a booming market apply universally and can significantly affect the ultimate value. This needs to be discussed and understood before proceeding to avoid misconceptions of what figures can be reached.

The industry multiple and EBITDA figures of the individual business are the common parameters used in valuation. But a business’s achievements can carry significant additional value and opportunities to a potential buyer, too. These can include patents and industry certification of LTAs that offer stability. Such factors can easily be overlooked by business leaders and advisors who do not have the right experience or technical knowledge.

Don’t be too narrow in your search for buyers

Looking at just one type of buyer is limiting. Getting the right type of acquirer is critical to final deal value. Private Equity and VC look for opportunities to buy, build and re-sell businesses for return over, say, a three-to-five-year period. It’s reasonable to expect that they will want to buy on stringent terms and not “over-pay” for the business. The acquisition may form part of an existing buy-and-build strategy and present opportunities as a key bolt-on to an existing portfolio. But trade buyers are more specific and often result in greater value for the sellers. Trade buyers have a genuine interest in acquiring what the seller has for themselves, be that product related, routes to market, supply-chain opportunities or access to technology that it would take longer and possibly be more costly to develop in-house.

Don’t forget to look abroad

It also pays to look beyond the home market. According to the ONS, between April and September 2023, there were more than 800 transactions of over £1m in the UK. Of these, overseas companies spent £5.4 billion on acquisition of UK based entities in Q3 alone and, over the same period, £2.2 billion was spent by UK companies acquiring businesses overseas. Of course, additional factors need to be addressed for cross-border transactions to ensure local regulatory compliance or factor in any changes that would need to occur.

Don’t under-prepare

Preparation is key – from the sell-side and the acquirer. For a deal to run efficiently and smoothly, and to eliminate the possibility of “deal fatigue”, the seller should have all due-diligence material meticulously prepared for presentation, at the appropriate moment. Detailed information should perhaps be held back until an indicative offer has been made. Whist all information should be transferred under strict confidentiality, it is a two-way street. An acquirer should display genuine interest and an ability to transact early in the detailed negotiation stage, to instil confidence in the seller that the transaction can proceed, subject to all criteria being met.

Don’t underestimate the complexities of integration

The buyer should also give consideration as to how the target acquisition will integrate into their current business culture. Significant change can result in scepticism and potential loss of staff which diminishes the benefit of the acquisition. This may include the negotiation for the seller and management team to remain in place throughout a transition period or beyond.

Have a clear exit strategy

It is recommended that the seller has an exit strategy in place before any advisor presents the business to market. That strategy includes financial planning for the year ahead and the time required to present the business as positively as possible – tidying up any areas that require attention to show the interested parties what they would be taking on.

Don’t make last minute changes

Whilst operational and financial synergies are advantageous, they are often not critical to the success or failure of a transaction. Part of the integration process for the acquirer will be to see how best to adopt the processes and functions of the target business. Making significant last-minute operational changes to try to impress an interested party carries the risk of unforeseen complication. It is always better to show the business in its best light as it is – after all, it has got to where it is by running that way. If an acquirer wants to modify or change its direction post-acquisition, they will have already made that decision when signing.

Acqius offers a wide-range of sell-side and buy-side M&A services for SMEs, entrepreneurs, start-ups and other firms. These include exit strategy planning, valuation advice, asset divestment and potential-acquisition searches.

Written by
Clive Stanley
Written by
February 15, 2024