Mergers and acquisitions: a guide for buyers and sellers

ACTIVITY across the mergers and acquisitions sector remains strong, despite the economic challenges many businesses still face.

But the most recent data indicates the number of deals taking place has been down in recent years.

According to official Government stats in Quarter 3 last year (July to Sept 2023) the total combined number of domestic and cross-border mergers and acquisitions (M&A) involving a change in majority share ownership was 362.

This was 117 transactions fewer than Quarter 2 (Apr to June) 2023 (479).

The value of inward M&A (foreign companies acquiring UK companies) in Quarter 3 2023 was £5.4 billion, £0.7 billion higher than the previous quarter (£4.7 billion), but lower than all other quarters post-2020.

At Dropjaw Ventures, I’ve noticed a huge amount of activity in the mergers and acquisitions space in recent years. We are witnessing and experiencing significant demand from managers , directors and shareholders – all looking to exit their businesses as they seek to move on to fresh challenges and or lifestyle changes. On the flip side there is pent up demand from buyers looking for accelerated growth from a drive in organic sales and via acquisition of complementary organisations.

Acquisitive growth is driven by buyers who are typically looking to achieve five things;

1. Acquire market share in current markets;
2. Gain access to new geographical or vertical markets;
3. Secure access to scarce resources such as skilled people and or intellectual property;
4. Reduce the amount of competition within their market place;
5. Leverage their own infrastructure to create enhanced earnings per headcount.

Buyers are always looking for bargains and compelling transactions, whilst sellers are always looking to maximise shareholder value and returns for their years of hard work and rewarding the risks and sacrifice.

One of the biggest traits I have  come across over the past decade of advising on transactions is their model of ” Death, Debt and Divorce”. If a buyer smells one or more of these issues in a transaction, it becomes more of a predatory buyer looking for a great discount and increased preferential terms due to the need for the seller to exit quicker. Setting and managing the right expectations is crucial to establish early in the process and sets the precedent moving forward. Don’t be on the back foot from the start.

Within the UK technology space ( Managed Services Providers (MSPs) and professional services market the legal, accountancy and estate agencies the market is especially buoyant, with significant consolidation driving increased levels of interest and transactions. Over the past few years we have advised many buyers and sellers guiding them to a “win, win”  transaction by following some simple and proven processes which we can share some of those first all important steps with you;

My three golden rules if you are a buyer are:

1. Be clear on your target acquisition motives and criteria;
2. Consider if you are ready for an acquisition- anyone can acquire a company but consider , how you would fund it, the cultural fit and who would be responsible for the integration
3. Have a clear idea of how you would deal with the distraction of the search for companies, the initial sifting, setting up and managing those all-important first meetings. Remember, first impressions count as sellers have generally lots of choice on if and who they want to sell to.

And, if you are selling:

1. Start with the end in mind and prepare now even if you still feel that you are 1-3 years away from a potential sale
2. Document all of your internal processes in a target operating model so it’s clear on what and how you run your business
3. Maintain clean, clear and comprehensive records and statistics around revenue, margin and customer growth, revenue per headcount, HR and regulatory requirements

Buying and or selling a business can be a daunting, challenging and emotional time which needs to be managed carefully. It can also be distracting from time away from actually running your company.

If any of these points resonate with you and for an initial discussion, please email me on roy.shelton@dropjawventures.co.uk  or call me on 07977 237284.