Get The Answers: Acquisitions need a good plan

Matt McKendry, accounting and advisory partner, Deloitte. Photo / Supplied

Growth opportunities are the best reason for expanding, writes Matt McKendry, accounting and advisory partner for Deloitte.

Entrepreneurs of small businesses get to a certain point in their company's life where they need to sell or reinvest to take it to the next stage. Conversely, buying another company can help you leapfrog to the next phase.

At what stage in a small business' life should the entrepreneur look at selling up and moving on to their next project? What are the triggers?

There are many reasons that trigger an entrepreneur's exit from their business and unfortunately in most cases, this is not a very well planned event. For high-growth entrepreneurs it often happens when the business needs new skills and capital to reach another level, mostly expanding into new markets. If you look at some recent transactions of this type, such as Next Window, Hyperfactory and M-Com, they said a big reason for the sale was because the purchaser offered the business a better home for expansion, along with a favourable cash payout for shareholders.

Too many New Zealand companies fear the sale, preferring to fulfil their entrepreneurial dream of global domination. However, they should sit back and appreciate that a well-planned sale is most often good and provides an opportunity to realise value and move on.

Fine examples of people who have done this are Rod Drury, Sam Morgan and Geoff Ross, who have successfully built businesses and then moved on to new, bigger challenges.

Now is a good time for well-financed businesses to make some acquisitions. What should small business owners be looking for in an acquisition? What should be on your checklist when making a purchase?

Now could be a good time to make a move only if you have access to capital and can find the right opportunity. But it's crucial to be very clear on the purchase rationale. These are most commonly the ability to access: customers and market position, capabilities in the form of skills and technology, and cash flow. The best buys are often the most unlikely because they position the business in clear space with new skills to strengthen the business.

While there is always a lot of talk about industry consolidation, often these types of acquisitions do not deliver material value creation because they risk combining two ordinary businesses, or worse, playing to the lowest common denominator.

My preference is that you look for real growth opportunities in an acquisition, not a survival lifeline, unless your core business rationale and purpose is industry consolidation.

If you are considering a purchase, make sure you have a well developed plan and tight timeline for realising potential benefits.

What worthwhile acquisitions have been made in the past year? What can an acquisition do for a growing company when done well?

Ecoya's acquisition of Trilogy was a ripper. It provided Ecoya with a number of new attributes that should play out in the fullness of time, such as complementary products and markets in quite different areas along with a highly profitable business to help fuel market expansion activities.

This transaction ticked a lot of the more unconventional, or less obvious, boxes, which is why it should provide a good outcome for shareholders.

Any acquisition needs to be sold with a clear rationale and a detailed plan for how gains and value will be created.

I have seen too many acquisitions leaving value on the floor because after the hunt and kill (doing the deal) executives move on to other pastures, forgetting that the real job is in the operational execution and delivery.