With successful M&E businesses with strong balance sheets continuing to look towards further growth, our corporate finance partner Laurence Whitehead outlines the key steps to a successful business acquisition in the M&E sector and explains how an experienced corporate finance expert can add real value to the process. 

Identifying and approaching target businesses 

If you initially choose the wrong targets or approach the right ones in an ‘inappropriate manner,’ your whole strategy can hit the rocks. Engage with an experienced corporate finance practitioner from the outset to help identify the right targets and to make the first approach.  Potential vendors want comfort that your initial approach is serious and getting external advice from the outset adds genuine credibility to your strategy. 

Valuing a prospective target 

Your corporate finance adviser will look not only at the asset base of the target business but also its potential to generate cash. Valuing a business based purely on its net asset value does not necessarily produce a ‘fair market value’ if the business is profitable. So, an equity valuation based on a multiple of sustainable profit alongside net cash/debt and normalised working capital adjustments are normally more appropriate. Deciding the level of sustainable profit, an appropriate profit multiple and what constitutes normalised working capital all require judgement and M&A expertise. 

Financing 

Finding the right targets and valuing them correctly only gets you so far. How do you ensure there is a funder out there prepared to back you financially?  What do they want to see in order to make a positive investment decision?  Fortunately, an experienced corporate finance adviser will be well positioned to advise you in these matters.  There are a number of ways to finance acquisitions: conventional high street bank debt, private equity, venture capital, business angels, mezzanine funding, asset-backed lending, and structured finance, to name but a few. Your adviser will assist you to prepare a 3–5-year funding model which outlines the key parameters of the acquisition for funders and will then introduce you to a wide range of financiers, not just the well-known high street lenders, working closely with you to get the right deal and funding structure in place, and at a competitive rate. 

Heads of terms 

Agreeing a detailed outline of the deal with the vendors can be time consuming and costly, even when it is dealt with in a focused manner from the outset.  There may be conflicting aims at this stage of the process, so trying to muddle through by ‘parking’ potential deal breaker issues till later is not advised.  A good corporate finance adviser will work closely with you to ensure that all key issues are considered, addressed, and clarified before the heads of terms are agreed.  

Due diligence and beyond 

Once the heads of terms have been signed, it is then time to get your corporate lawyer on board to work alongside your corporate finance adviser on the due diligence and detailed transaction documents.  But that is a topic for another time………. 

For more information, contact the Corporate Finance team on 01908 662255 

https://mha-uk.co.uk/insight/knowledge/the-key-steps-to-a-successful-business-acquisition/