With current trading conditions proving challenging to growth, business and professional services (BAPS) firms might consider the purchase of another company to boost performance. We examine the potential advantages of such a strategy and explain how to make a successful acquisition.
Recent research from Capify found that almost one in 10 (8%) owners of BAPS firms were looking to sell their business in the next 12 months. While 40% of these firms say this is due to retirement by the owner or a senior director, 30% blame the challenging business climate in the UK. These figures highlight the toll that tough trading conditions and continued economic uncertainty can take on owners. However, the current situation could also provide an opportunity for those looking to boost growth.
At present, growing organically may not be straightforward as high inflation and rising interest rates cause existing and potential customers to tighten their belts and reduce costs. But acquiring a book of business from a rival accounting, legal, or architecture practice that has chosen to exit the market may be a smart way of growing a client base and driving revenues and profits.
Acquisition versus organic growth
There are several reasons to favour growth by acquisition over organic growth, but also a number of potential pitfalls to be aware of. Possible benefits include:
- Faster expansion with lower risk: Growth by acquisition is a far quicker route to expansion than organic growth, and it can be a lower-risk option because it involves buying a business that is already established in a particular market – and which has the financial records to prove the viability of its operations.
- Immediate presence in new areas: For businesses that are looking to move into new parts of the UK or even overseas markets, an acquisition can be a much simpler option. It may be easier to buy a firm with existing local presence than try to build your firm’s reputation in a new location.
- Savings through synergy: Following an acquisition, the new, larger business may be more efficient than the sum of its parts. This efficiency can be achieved through cost savings derived from economies of scale and rationalisation of functions such as finance and marketing.
- Access to talent: As well as delivering a larger client base, buying a rival business can bring experienced new staff into the company.
Managing the acquisition
However, the immediate increase in size that an acquisition creates can present problems in terms of assimilating new clients into your business operations and systems. There is the issue of the relationships with clients of the acquired business: they are likely to be looking for continuity and reassurances about service levels. As such the acquirer needs to establish which staff it should try to retain following the acquisition. Clear and regular communication with new clients and staff of the acquired business is key. Thought also needs to be given to aspects such as the integration of technology and other services, as well as branding and marketing of the new acquisition.
Identifying acquisition targets
The first step in any acquisition process should be to establish what the firm is looking to achieve by buying another business: does it want to move into new geographic areas, for example, or to diversify into a different but related market where it can apply its current operational expertise?
Industry networking and speaking to local professional advisors, can be a good way of finding businesses that are up for sale, or whose owners are considering an exit. There are also a number of online services – such as Hornblower Businesses or Daltons Business – advertising BAPS firms for sale. In all cases, the buyer should carry out detailed due diligence on any target, looking at the likes of its financial records, client contracts, and legal obligations.
Specialist advice and valuations
In many cases, specialist advice should be a valuable part of the process, for example in assessing the viability of the target business or in raising the finance necessary to complete the deal. Valuation professionals can also assess a fair price for the target. As a rule of thumb, experts say that an accountancy practice can be valued at anywhere between 0.5x and 1.5x of the gross recurring fees (GRFs), that is, the income that is due to be generated over the next 12 months. Third-party valuation advice can provide a more accurate and evidence-based figure.
The continued challenges facing owners and operators in the business and professional services sector is forcing many to consider exiting their firms. This can provide a very real opportunity for those who are considering growth through acquisition. Delivery of a successful acquisition strategy needs a well-defined approach, along with careful planning and execution. Due diligence is key to delivering the right outcome, as is understanding the finances involved in any transaction.
Unless your firm has extensive cash reserves, funding both the initial deal and the costs associated with integration may well require an injection of external capital. Owners will need to calculate the costs of repayment in their viability planning.
Successful acquisition of a complementary of competitor business can propel your firm and deliver expansion much quicker than relying solely on organic growth. At Capify, we have helped thousands of business realise their growth ambitions with fast and flexible funding solutions.
Business loans can be used for any business purpose including growth through acquisition. Check to see if you’re eligible for one of our loans with our online eligibility checker. Or, if you’d prefer to talk to a member of our team, we’d be happy to guide you through the process. Give us a call today on 0800 151 0980.
