In his three-part series, Build or Buy? Equiteq’s Adam Blatchford discusses the pillars for successful growth through acquisition. In part one Adam addressed the strategic advantages acquisitions can offer.
Here in part two, he looks at the ways a professional service firm can fund an acquisition.
Generally, M&A news tends to give the impression that acquisition is an exercise exclusive to huge corporations with big cash balances. In the last year the consulting sector has seen a number of multi-billion dollar deals, including Blackstone spending $4.8 billion for Aon’s HR Outsourcing business to create Alight Solutions, and $2.6 billion for British engineering consultancy Atkins from SNC-Lavalin.
This perception fails to scratch the surface of acquisitions and hides the real picture. Of more than 2,500 consulting deals that took place in 2017, the mean deal size was a more reasonable $69 million. The median deal was even lower at $12 million, meaning half of all deals took place below this threshold. These numbers are far more attainable for a ‘regular’ growth-stage business and demonstrate that an acquisition is more achievable than one might have initially thought.
The people-based nature of consulting makes it even easier to fund an acquisition than in other industries, as there are generally fewer expensive fixed assets and lower integration costs. The remainder of this blog looks at the most common routes to an acquisition and provides guidance on how to achieve the strategic needs of your business plan. It is possible to use a combination of these options to produce the right package that tempts and incentivizes the shareholders of your target firm.
The ‘simplest’ way to fund an acquisition, and arguably the most attractive to the target, could be a pure cash deal. This route requires using the cash on your own balance sheet to acquire the full share capital of the target, which can be achieved by reducing your working capital to release the cash.
Option two is using debt, allowing you to complete the desired acquisition when you do not have sufficient cash available. More complicated than using cash, this route entails taking on the risk of a loan coupled with the burden of suppressed profits as you pay it back.
The third option is to secure a financial backer to bank-roll the acquisition. A notable advantage with financial backing compared to using debt, is the ability to spread the risk amongst yourself and the backer, but of course the reward as well. One important consideration is timing, if you are not currently backed, pursuing this route takes considerable time and effort to execute.
The fourth option is to offer equity in your firm to the incoming shareholders of the target firm, in essence a share swap. This remedies the requirement for cash but hinges on both sides buying-in to the respective valuations of the individual firms and new combined shareholding structure. A notable advantage of a share swap is that your new colleagues are incentivized to commit to growing value in the merged firm as they too will benefit.
When structuring an acquisition, it is important to ensure you maintain focus on positively building your own equity value and preparing for future sale. Therefore, a successful acquisition strategy may involve a combination of the above options to not only add immediate value but to create the right structure and incentives for the acquisition to continue building value into the future.
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