Acquisition Strategies & Case Studies
Acquisition Strategies & Case Studies
Negotiating acquisitions & Walking away as a potential acquirer
- MCA effectively uses everything you will learn in our programs AGAINST sellers when acquiring on behalf of clients (and ourselves).
- You DO NOT want to be on the receiving end of this, and in a position where you HAVE to sell.
- When approaching a potential acquisition, the key is to get engagement. Discuss a MULTIPLE (NOT PRICE) range that you are prepared to pay, depending on your more detailed assessment of the business. Most owners over-rate themselves and will have misplaced confidence, thinking that they are at the top of the range.
- If they actually do have a great business, great. If not, the best time to deliver the reality message is well down the track when they have committed to the notion of selling. We use a number of tools, including Value Builder and VOP Valuation processes, to demonstrate this when appropriate.
- Further, the target’s earnings are often inflated and/or not easily sustainable. Again, at the appropriate time, this can be used to demonstrate the reality of sustainable earnings on which the multiple is based.
- When you get to negotiating the price, once you have received the financials and understand the business better, the deal will often flounder through owner disappointment.
- At this point, you will often politely but firmly walk away, whilst keeping the door open for future discussions.
- Time brings a lot of owners back to the table at a much more reasonable level at which you can transact.
The key things that should frame most negotiations are:
- Shifting the discussion from historical to sustainable earnings; and
- A multiple rated against the reality of the RISK of the business, rather than the owner’s misguided original perceptions based on “comparable” sales they have been told about, that are often anything but COMPARABLE.
NOTE: These areas are exactly what we show you how to improve through our coaching to allow you to shift from DEFENDING your historical earnings, and high-risk profile, to PROMOTING the further growth potential and LOW RISK of achieving that.
Case studies
Multiple arbitrage
When buying businesses, we are looking to pay a multiple that is less than what ours is worth, so we increase the overall value of the combined entities.
The only exception is where the synergies gained make up for any premium paid, however the goal is to minimise this premium as much as possible.
On the flipside, when we assess buyer price capacity, we are looking at what the added value to them is from purchasing the business. We are then trying to capture as much of this synergistic value as possible.
Manufacturer and distributor
- We have advised on a number of acquisitions for a particular manufacturer and distributor.
- We have paid between 2 and 4 x EBITDA for these, mainly on terms of 3-5 years.
- Every business was approached directly and all owners agreed to stay and run the businesses for between 2 and 5 years, mostly on salary plus a % of profits. The most attractive deal was a business we paid 2x Ebitda for because it had a major customer concentration issue, with one customer who made up 95% of its revenue.
- In the hands of the acquirer, this customer concentration issue was substantially dissipated, with multiple arbitrage immediately adding $10m in value.
Garden & building supplies business
- We bought the business on behalf of an industry consortium and paid 4X EBITDA for a 3-site business earning around $2m.
- 70% of the earnings were generated by the main site, which enjoyed a huge geographic advantage over competitors. This translated into lower costs and faster deliveries to (and collections by) customers.
It would have been almost impossible to replicate in proximity to the most lucrative market in the region. The logistics and general operational efficiencies and reporting were sub-standard, but these were all fixable with a bit of effort and minimal expense. In reality, the key site was an inefficient cash-cow that was still worth at least 6x EBITDA.
- This site alone underpinned an expansion to 10 sites and a market-dominant position.
- In summary, the vendor undervalued the competitive advantage of the key site and the brand and over-valued the effort required to systemise the business. They did not have the skills and the owner was a typical micro-manager who didn’t think anyone else could do as good a job as him, which stymied his ability to expand any further.
- Over the next 3 years systems were upgraded and a program of targeted acquisitions (at “market” multiples of 4x) undertaken to provide geographic coverage of the majority of Melbourne and more efficient asset utilisation.
- Customer loyalty increased through being able to purchase a consistent product and service at more locations. The business was also able to offer more attractive terms to their customers.
- Further, major product suppliers became more reliant on the business and were willing to provide lower prices and more attractive payment terms.