Acquisition is usually the domain of the big boys, but smaller exporters can certainly benefit from taking on another business abroad. Here’s how to make the process as smooth as possible. It's a serious undertaking when a business decides to acquire another, particularly if the acquiring business is a small or medium-sized one. While having enough money is usually a major concern for all types of takeovers, acquiring an overseas business will also require significant thought in regard to legal and cultural considerations. This is a guide that outlines how smaller businesses should approach the acquisition process.
Secure your strategy
Be very clear about why you're considering acquiring the other business. Acquisition has many benefits, notably related to speed in gaining market share, technology and/or skills. "If you're in a market and only have a small market share, there's probably going to be a long path for organic growth. You may want to acquire to increase meaningful market presence," says Symon Brewis-Weston, executive general manager of Local Business Banking at the Commonwealth Bank. "You may use acquisition to enter a market. So in a market where you don't exist, instead of starting a business from scratch you may just acquire a business." He also nominates possible advantages such as gaining scale or cost efficiencies, or buying the human capital of the other business: "You might acquire because you think they may have a better R&D capacity or a better skill base or technical expertise." Reducing competition, or diversifying your business are also common reasons for acquisition. As an expensive, research and time-intensive process, acquisition may compare unfavourably to other methods of reaching your business goal, such as licensing another firm's intellectual property, attaining a certain skill base through outsourcing or setting up a joint venture. Clive Rabie is the CEO of the Reckon Group, which comprises of business services and software. "We like to buy best of breed technology as opposed to customer bases," he says. The process then includes the human resources level-"look at the management and the people involved"-before the numbers: "Look at the earnings, numbers and profit against capital requirements, how capital intense it is, and look at your own financial position: whether you're growing organically." In the end the equation should be fairly simple: "The main drivers are whether it's strategic to your business. The next thing I would look at is whether it's synergistic and then how it affects your business," he adds.
Plan for people
One area that should attract as much attention as the finance aspect is cultural fit. Not only do businesses have different cultures within them, when you're trying to join two businesses from different countries it's a more significant factor than usual. Your handling of culture could mean the difference between success and failure. "When you want to go overseas there's a whole other layer of cultural focus as opposed to just being in Australia," notes Rabie. "If you're going overseas, add another layer of consideration: 'okay, how do we manage? What sort of relationships do we have on the ground in those places? What are the risks? Who, locally, can look after that relationship?' On the positive side, from the acquisition what can you bring back home? And that goes back to the synergies." Brewis-Weston agrees that not enough attention on culture can lead to problems: "The biggest risk that I see is where you've acquired people to do a job and you've imposed a way of doing business that might be different. It can lead to a great deal of disenfranchisement." Looking internally, he insists that businesses understand the cultural reasons for why your business is already successful, as well as understanding the skill capacity of your staff. On an external front, do some research on the operating context of the business to be acquired. "Understand the culture of the country and try to get as much of an understanding as you can of labour laws and culturally how those people operate. Typically, most people fear the acquirer unless it's a survival thing, and most people will assume that costs will be cut," he notes. "You have to be clear about the messages that you're going to bring, and try and have people on board who can advise you of the cultural issues and how to manage that." Brewis-Weston admits that a number of acquisitions lose value because the acquiring business has either overpaid because they don't understand the asset they've purchased, or they "don't get the people piece right". "If you're buying a pharmaceuticals company because they have a good R&D team and you change their culture, they could then leave to a competitor and half your team is gone, which may be the reason you bought it in the first place," he gives as an example. Other stakeholders are the customers of both businesses. The acquiring business needs to understand that if they change things, they may also be changing the relationship between the acquired business and its customers. If you're acquiring a business to gain market share, this is a crucial consideration. "A lot of people don't think of how their customers might react. You have to think of why people are customers of that particular company. You need to maintain the link between that service and the customers; if you lose that, you're in real trouble," Brewis-Weston remarks.
Select your system
Be aware that when you acquire a business you will potentially have two systems for your combined businesses-everything from administration and payroll systems to IT infrastructure-and these will more than likely need to become one to achieve operational efficiency. On a human resource level, you may need to decide how the pay structure will work. For example, one business may have a negotiable payscale, while the other may stick to strict pay levels according to role. When you acquire a business, you'll need to decide which to use and manage the implications of that on a personnel and financial level. There may also be other expenses you need to factor in. In the USA, for instance, it is usual for employers to pay for their employees' private healthcare. In adopting that, will you also need to pay private healthcare for your employees in other countries, including your domestic business in Australia? IT systems also need some attention, says Brewis-Weston. "Do you choose your IT platform or their IT platform? I've seen companies that just choose their own system and haven't looked at the best of the other company. Understand your systems plan, how to migrate from platform A to platform B. If you can do due diligence around their systems, do so." Rabie supports the proper integration of two systems, even though he admits it's a long road. "Once upon a time you may have just bought a business, but now we have to integrate the websites, we have to integrate the CRM systems, the accounting systems, the IT. Usually there's different IT and you have to merge the technologies."
Research the regulations
Acquisitions are often subject to legal and financial regulations, and sometimes even fall under scrutiny for anti-competitive behaviour, which you should be wary of if you're acquiring to reduce competition. In a number of offshore markets there are rules about nationality of the business, which may include the need to have a local shareholder retaining a certain percentage of the entity. If the combined enterprise becomes wholly foreign-owned, it may also alter the business' tax status, and could change the operating environment of the business: for example, you may need to move premises to comply with zoning laws. Additionally, watch out for any liabilities you may inherit. "In a country like Indonesia if you buy a company, you inherit its tax liabilities, although there are clearances you can get from the tax department," notes Brewis-Weston. "The less complicated the legal structure and the tax system is, the easier it is to acquire." Employment laws will also affect your bottom line with regard to awards and existing certified agreements from the acquired business that may be binding to the combined business.
Transition with care
Have a transition plan ready to go from the moment the deal is done. A transition plan is "a people and communications piece" that incorporates all the above considerations and sets out clear steps for effective communication with all parties involved, says Brewis-Weston. This is pertinent when it's possible that some people may lose their jobs or change roles. "There are two companies and they both have an HR and IT department-which one are you going to choose? You both have a CFO, which one are you going to choose? Those things have very big consequences if you just choose all of your people," he says, adding that it's imperative you pick the most most qualified person for that job regardless of original organisation. "You need to tangibly demonstrate that and have a clear communications strategy around that. If all the jobs are going to company A and not company B, then people in company B will feel they have no future career and there will be attrition from that." Also be careful around possible attrition, as one of the reasons for the acquisition may have been to gain skilled staff. The last thing you want is for those people to leave, possibly to a competitor. You may be able to stop this by negotiating employment agreements imposing restraint of trade, but you need to have these ready to go as soon as you execute your transition plan. Understanding the risk elements in the acquisition process will equip you well at each stage. Rabie says as long as you're sure of your strategy, you should be fine: "There's no magic formula for this. Every acquisition is approached differently, and it can be a bit of a rollercoaster ride. You really do have to spend time thinking about it, but it goes back to the reasons and the strategy of why you're buying the other company."
Playing the game
Acquisitions can be an emotional game, and often one that involves the blood, sweat and tears of hard work over a long period. To be successful at acquisition, CEO of the Reckon Group Clive Rabie advises having two separate management teams: one that looks after the day-to-day operations of your existing business, another to research and negotiate the acquisition deal. "Try and handle it separately from your existing business," he says. "Acquisitions are usually exciting and fun and so you often get people focused on the acquisition who should be focused on the existing business." He also recommends knowing when to walk away: "Any deal, you have to be prepared to walk away from. You just can't get emotional about it. Even if it's on the last day and something just feels wrong, say 'no, it's not going to work for us' and get up and go." Symon Brewis-Weston, executive general manager of Local Business Banking at the Commonwealth Bank, agrees. "My ego tells me we've taken 12 to 18 months getting a deal together and we're very close. Maybe someone else puts a bid in and you end up paying over and above what you wanted to, or you accept conditions that at the start you thought were unacceptable," he says. "You need an independent person, a circuit breaker, who can make decisions who is not as emotionally involved as the CEO or CFO. Perhaps you should just walk away."
Doing your due diligence
Due diligence is a process undertaken by a buyer of a business in order to determine the attractiveness, risk and issues of that potential acquisition. The due diligence can be either external (assessing the future potential of that company in a competitive marketplace) or internal (assessing the key legal, financial and managerial issues within the company). As part of the due diligence process it is also important to ascertain:
- Why the owner is selling
- The profitability of the business
- The cash flow of the business
- The track record of the business in winning and retaining customers
- Whether the owner wants cash rather than shares
- The funding implications impact on cash flow.
-Industry & Investment NSW (www.smallbiz.nsw.gov.au)