Roshan Puri, Investment Director

Buy-and-build, roll-up, bolt-on – these sounds more like manufacturing processes than strategies to grow a business. While the private equity industry is known for using confusing terminology, it is also known for helping companies to acquire other businesses – we explain how.

Why acquire?

Expanding into new geographic markets often means trying to build your brand, reputation and employee base from scratch in a geography with a different business culture, customer buying habits and talent pool. It can take a long time to get right, especially for a ‘people-based’ business with an account-management approach to selling (distribution partners can help add local credibility for businesses with a more productised customer offering).

One of our former investments, Fishawack Communication (now Fishawack Health), used an acquisition strategy to accelerate its international growth. Its acquisitions in the UK, the USA and Switzerland brought in teams of people with a track record of success, strong local customer relationships and expertise in highly regulated local healthcare markets.

Diversifying your customer proposition with complementary products and services is an important way to build resilience into your business model and encourage more ‘sticky’ relationships with customers.

Another of our portfolio businesses, ACC Aviation Group, acquired a consultancy-based business in Dubai, bringing an additional expertise to its client base across the world. This deepened ACC’s customer relationships, adding longevity and diversity to the revenue streams. Philip Mathews, CEO of ACC says: “The acquisition has enabled us to provide a full-service offering, deepening relationships with our customers. YFM sat alongside us in agreeing the acquisition criteria and then on the subsequent acquisition search.  YFM helped us navigate the deal with an efficient and robust process and were key in the negotiations to agree the deal with the vendors.

Acquiring a competitor can lead to a ‘one plus one equals three’ type calculation. Combining the brains of two top organisations in a sector can lead to greater innovation, better customer service and a more efficient business.

Our investment in Indigo Telecom Group helped it to acquire one of its closest competitors, doubling its size overnight and giving it the bandwidth to grow internationally together, rather than fighting over the same turf as independent organisations.

Of course, acquisitions also increase your business size, potentially making you more attractive to an ultimate acquirer.

How can private equity help?

The origination, negotiation and due diligence of acquisition opportunities is time consuming, requires a robust process and an element of pattern recognition based on experience of what has worked well in the past or more importantly, what hasn’t.

Good professional advisers are an essential part of any deal, however an equity partner with a vested financial interest who’s going to feel the pain of a costly mistake alongside you, will be very focused on helping you avoid them. The process of learning relies on a feedback loop of seeing the results of decisions made. Working with management teams of companies for years after making an investment decision allows private equity to codify the hallmarks of a successful deal.

An acquisition strategy is heavily influenced by the nature of its funding. Flexibility of funding can be a huge advantage – allowing you to go after bigger opportunities, faster and with more certainty. Avoiding sleepless nights worrying about banking covenants can also be quite attractive to some.

The cost of capital is relative to what it achieves. Private equity capital is paid for in a large part by the growth in the value of a business, whereas bank debt it paid for out of its cash flows. The purpose of private equity investment is to encourage growth by freeing up a business to invest cash flows into operations.

What we have learnt from supporting portfolio company acquisitions

Acquisitions are rarely a ‘quick win’ strategy. Significant work is required to properly integrate operations, systems and cultures and, to do this successfully, the acquiring business must provide a stable platform. Agreeing a common ‘first 100 day plan’ prior to the deal provides clarity, highlights areas of risk and helps prioritise actions.

Focus on customers and employees to ensure they understand the benefits of the acquisition to them, creating alignment and a common understanding of the value of the deal to all stakeholders.

An acquisition must have both strategic and financial logic. A clearly defined strategy and a shared vision of innovation and sustainability made the acquisition of Aluvista by Macro Art a compelling proposition. Michael Green, MD of the combined business, notes: “The teams shared the same vision that re-usable modular systems, which reduced waste and could be completely recycled would only increase in demand over the following years. This acquisition provided us with the chance to accelerate innovation and sustainability in our offering. YFM helped us in scoping and then executing the acquisition and continue to play an important role in helping set our strategy.

Acquiring a business is not a zero-sum game. You are not trying to win in a negotiation, but rather agree a good position for all parties. Deal dynamics are as important as the quality of the business. The structure of a deal must incentivise behaviours that are in the long-term interest of the combined business. Take time to think this through. An investment partner with experience and a vested interest in the growth of your business should be able to help you see round corners.

Establish a process, define the acquisition target criteria and stick to it. Ensure you have the right resources, support and competencies to originate, review and negotiate an acquisition without distracting from your organic growth plan.

At YFM, we review around 800 investment opportunities a year while looking for the right team to back with £2m-£10m investments from our Growth Capital funds and Buy-Out funds. The lessons we’ve learnt over 38 years of investing have been codified in our investment-review process. Sharing this process, our experience and resources to support businesses in making acquisitions can help give companies a competitive advantage. This is why private equity can be a good partner to support your acquisition strategy.

 

Approved for the purposes of Section 21 of the Financial Services and Markets Act 2000 by YFM Private Equity Limited (‘YFM’), which is authorised and regulated by the Financial Conduct Authority (FRN: 122120). YFM is the Investment Manager to British Smaller Companies VCT plc, British Smaller Companies VCT2 plc, YFM Equity Partners Growth I LP, YFM Equity Partners Growth Fund II LP, YFM Equity Partners Buyout I LP and YFM Equity Partners Buyout II LP. YFM Private Equity Limited is ultimately owned by YFM Equity Partners LLP which is registered in England and Wales No: OC384467. Registered Office: 5th Floor, Valiant Building, 14 South Parade, Leeds LS1 5QS.

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