Times may be hard, but companies still need to make acquisitions - and it’s more important than ever to follow the golden rules

Despite the credit crunch and the threat of recession, recruitment companies continue to seek acquisition opportunities.

So in the current climate, do the usual rules of engagement apply? The answer is, “Yes — even more so”.

Finding the target

One of the major stumbling blocks for recruiters wishing to make acquisitions is the ability to identify suitable targets. But choosing an unsuitable target may help to explain the relatively high proportion of acquisitions which turn out to deliver less value than anticipated.

Assessing the fundamentals

It can be easy to get carried away in the excitement of looking at targets and imagining what they could do for the acquirer’s business — so it is vital to assess the fundamentals of the target to ensure there is substance and sustainability. Some key areas to consider include:

• Growth pattern - sustained or erratic?

• Client loyalty

•  Staff loyalty

• Consistent gross margins and comparability to peers

• Quality of clients

• Length of any client contracts

• Quality of management information

• Market position and reputation

Many of the above will be market and deal-specific, but most if not all are likely to be relevant to any target.

Valuing the business

This is probably the most critical element of any prospective acquisition, for if the price isn’t right there will be no deal. Keep the following in mind:

• If you think the deal is an absolute steal, the vendor probably will, too

• Always leave room for some negotiation

• Be flexible and listen to the vendor

• Make sure your offer keeps key people incentivised after completion

Selling the deal to the target

Buyers sometimes forget that they have to sell the deal to a vendor, who may have a number of offers to evaluate. Likely areas to consider include:

• Reputation of the buyer

• Certainty of receiving any deferred or contingent consideration

• How well the staff will be looked after (never underestimate the emotional attachment a business owner may have to their staff)

• How negotiations to date have been conducted

• The strategic plan of the buyer

• The success of any other acquisitions made by the buyer

Funding the acqusition

Funding options are currently more limited than they have been in recent times. Buyers should give full consideration to the funding requirements before submitting an offer, to ensure their offer is affordable and fundable.

If a purchaser has to renegotiate because they cannot afford the terms they have offered, assume the vendor will become extremely sceptical and may even walk away from the deal at that stage.

If a purchaser follows these five golden rules, there is a very good chance that a well-constructed bid for a target will be successful.

If it isn’t, another buyer probably hasn’t followed the golden rules and will be paying over the odds.

TOP TIPS

1 Ensure the target meets the originally devised criteria

2 Evaluate the underlying business early in the deal process to determine what value you are likely to receive if you make the acquisition

3 Set a ceiling on the price you are willing to pay and walk away from the deal if necessary. Do not let egos take over from commercial logic in driving the deal process

4 Remember that a successful deal is one in which both sides are satisfied with the outcome. A vendor is likely to be interested in more than just the initial cash consideration

5 Ensure the offer has financial backing before it is submitted