When it comes to growing your business, one of the most effective strategies can be to buy other suitable companies. But first you must prepare for a smooth acquisition process, as Alistair Jaque explains.

BOOSTING growth within your business is essential, but often even more dramatic expansion can be achieved through acquisitions and other alliances. Acquiring, or buying, other business can complement your company's core strengths and leverage existing customer relationships.

And it's a notion catching on. According to recent research by Grant Thornton, 42 per cent of privately-held businesses in Australia are planning to grow though acquisition in the next three years. In the past decade, the value of merger and acquisition activity in Australia has increased five to eight times.

There are many legitimate reasons for acquiring another business, including expanding into other markets, reducing expenses, creating opportunities for cross-selling and eliminating competition. Growth may be achieved not only by buying similar or competing businesses, but also through changing the structure and developing business alliances to introduce new products and services or expand into new markets.

Growing your business may mean introducing new owners or anagers to the business, but new people in decision-making positions can also introduce better processes and provide access to new networks and broader knowledge and experience.

So what makes for a good acquisition? The first step in developing an acquisition strategy is to identify your business's strengths and weaknesses. The next step is to identify the goals to be achieved. ln order to ensure a successful acquisition, it is essential to have a solid foundation in place in terms of the people, systems and resources, and to ensure that those resources are sufficient to handle integration. In addition, a well-planned strategy and realistic plans in terms of expectation and time schedules will be required.

Before making an acquisition, it is critical to assess whether the usiness to be acquired clearly fits into your growth strategy and if it will increase your competitive position and efficiency.

First up, identify the target – a prospective buyer can identify targets using various methods, including approaching potential target ompanies directly or by engaging an intermediary.

Enter into a confidentiality agreement – it is prudent for a seller to ensure that a prospective buyer has signed a confidentiality agreement before any confidential information about the target is disclosed. These provisions can be included in the terms sheet or in a separate agreement.

Enter into a terms sheet/heads of agreement – this document is a summary of the main commercial terms as agreed between the buyer and the seller, and should include a timetable for completion. The terms sheet usually remains subject to contract and is non-binding (except for the confidentiality provisions).

Conduct due diligence – this is the critical opportunity to investigate the target and to focus on the material commercial, operational, financial and legal issues affecting the target business.

Determine the value – the valuation of the target is a reflection of the following key elements:

  • profit projections and margin.
  • debt/equity gearing
  • cash flow & balance sheet
  • industry comparisons
  • non-financial factors.

Funding - the four main ways to fund an acquisition are: debt borrowing from a bank); equity (through investment from existing or new shareholders); cash-flow (through existing cash reserves); and merger (by buying a business and simultaneously selling a part of your business).

Negotiate the sale agreement - you will need to determine whether the assets or shares of the target should be acquired.

If a share sale agreement is used, this will consist of acquiring all he assets and liabilities in the target company. Where an asset sale agreement is used, the buyer is not obliged to acquire all the assets or any of the liabilities.

Exchange and completion – signing and exchanging contracts, and completing the transaction. Although acquisitions can be complex and time-consuming, they can be an extremely effective method of growing a business if properly planned, executed and managed.

Swaab was recently named winner 'Best Law Firm in Australia (Revenue < $20m)' and 'Attribute Award for Exceptional Service (Australia Wide)' and at the 2008 BRW- Client Choice Awards.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.