Now's a good time to branch out in business

Jan 12 2010 By Neil Warwick, The Journal

THE New Year has finally arrived and let's hope 2010 will breed better economic times for businesses in the region.

Despite the economic climate, there remain plenty of profitable businesses in the region that have cash available to invest. If businesses are keen to expand by way of acquisition and have found a suitable target, is this a good time to be thinking about doing so?

Having been quiet for the last 12 to 18 months, the Merger and Acquisitions (M&A) market is showing signs of life although recovery is likely to be slow through 2010 as the banks remain cautious. In the SME and small corporate sector those companies with cash reserves available to finance transactions are in a fortunate position.

While at the onset of the economic downturn prospective sellers appeared happy to wait for the market to recover in order to realise their investment, many are now accepting the fact that the number of buyers that are prepared to pay for businesses have reduced and are even prepared to dispose of their businesses rather than continue trading in uncertain economic times. For businesses with cash available to finance transactions, acquiring another business could prove to be value for money.

Notwithstanding the potential value in the market, any acquisition needs to be seriously considered in terms of whether it is a good fit for your existing business and whether the valuation the seller has put on the business is realistic.

Initially, you should think about whether the target is a fit with your current business in terms of matters such as its geographical reach and product range – do these elements complement each other? Your preliminary due diligence should also establish whether there will be any issues following an acquisition with the retention of key employees.

Having carried out the preliminary due diligence, you should have an idea whether the target is still suitable and whether the valuation you have put on the target is accurate. Evaluating matters in as much detail as possible at this stage is vital because as soon as you hit the negotiation stage, you are likely to start incurring significant legal and accountancy costs.

The progress of an acquisition therefore needs to be continually evaluated by prospective acquirers. What may have seemed a suitable target at the start of a process may turn out not to be once due diligence has been carried out.

The key is to continually question whether the target is value for money at the price you are being asked to pay. The answers to your questions will help you to decide whether it is in the best interests of your business to proceed.

:: For information about how Dickinson Dees can help SMEs, contact Neil Warwick on 0191 279 9375 or at neil.warwick@dickinson-dees.com