Many businesses are finding that increasing marketing efforts and cutting costs is just not enough to counter a continuing decline in revenues. So what else can be done to ensure your business survives?

One approach that should be seriously considered is making a strategic acquisition. Businesses may have discounted an acquisition as being too costly or too risky given current economic conditions but this need not be the case. With many businesses struggling, their value will have dropped significantly and in some cases a sale or merger may be the only way they will survive. The consideration paid for a business can be structured to reduce risk and immediate cash outlay. Methods commonly used are:

• Deferred consideration – here consideration is fixed but paid over a number of years.
• Contingent consideration – here consideration is variable and only paid if certain performance criteria are met.
• Deferred and contingent – a balance of fixed and variable consideration. This gives a degree of certainty to the vendor whilst protection to the acquirer and deferred payment terms.
• Non-cash consideration – here the acquirer can either issue its shares to acquire the target business or issue share options which allow the vendor to purchase shares subject to the acquired business performing to certain criteria post acquisition.

What are the benefits of a strategic acquisition?

There are potentially many benefits of making a strategic acquisition at the current time, some of which are set out below:

• Cost effective – you may be able to acquire a business in the current market at a greatly reduced cost.
• Economies of scale – an acquisition can increase turnover and contribution to your fixed overhead base. Duplicated costs such as premises and administration costs can be saved, making the combined businesses far more profitable than they were as individual entities.
• Geographical expansion – an acquisition could enable you to enter new geographical markets both in the UK and internationally.
• Diversification – an acquisition can let you increase the range of services offered by your business, enabling you to increase your client base as well as the services offered to your existing clients.

Why would a business want to sell in the current market?

Despite business values being depressed there may still be some significant benefits to selling your business now, such as:

• Extracting value – depending on the structuring, a sale may allow the vendors to extract at least some value that may otherwise be lost.
• Upside gain – if structured correctly, a sale may allow further consideration to be received as the market picks up.
• Release from liabilities – a disposal may facilitate the release of the vendors from onerous lease commitments and guarantees.
• Preservation of employment – whilst an acquirer would often look to reduce costs, the employment of the key staff would normally be retained.
• Tax efficient – where entrepreneur relief applies, capital gains arising on business disposals are only taxed at 10%.

Overall, an acquisition strategy or a possible sale should not be dismissed in the current market and we will likely see increasing activity in this area in 2011.

For further information, please contact Ralph Mitchison at rmitchison@menzies.co.uk