Despite the potentially turbulent times lying ahead if we enter a recession, the corporate investment market has high liquidity and is still moving. The essential rules regarding business takeovers remain relevant, not least Buyers should invest in businesses they understand, acknowledge the risks associated with the process or sector and take the necessary steps to mitigate against them.
Some of the common key risks associated with business takeovers can be broadly split into three distinct groups; customer risk, supply chain risk and people risk and all three present specific challenges during the investment process.
Business transformation / takeover risks
Potential investors should recognise that many businesses rely on a specific customer base for a high percentage of their overall operations. This may be reliance on a single customer or small customer base for a large amount of revenue generation and should these customers choose to take their business elsewhere post-investment, significant financial issues could arise.
Investors could find themselves taking over an organisation which is very different from the one they originally identified.
Maintaining strong customer bonds is especially important for some businesses which often experience tandem growth with customers and should this joint growth stop, the business could experience a period of stagnation or decline.
Understanding the customer base and associated risks is essential pre-investment activity. By conducting Pareto analysis and applying the 80:20 rule to customer data, investors can examine customer risk and establish what long term effect that changes to the customer base could have on the business.
Supply chain risk
Underestimating the supply chain risk associated with business takeovers can severely jeopardise their success. Examining a target’s supply network and identifying any crucial single suppliers or warehouses is a good first step.
Understanding the specific supplier relationships allows an investor to plan in the case of a problem arising, identifying any potential alternative suppliers and ensuring the business is in a strong position for any negotiations which may arise.
Different supply chains are obviously affected in different ways and specific categories of product are more susceptible to supply chain volatility. For example, consumer goods such as coffee, tea and chocolate are heavily dependent on the right weather conditions and can be seriously affected if these conditions are unfavourable. And we have all seen the impact of Covid-19 on the manufacture and transport of goods in recent years. Ensuring there is a plan B in place, such as a dual-sourcing supply chain structure, allows investment targets to mitigate the risks to their supply chain and should any price sensitivities arise, the end customer can be made aware.
People form a large portion of most investments and knowing where the risks lie in this area is important. Recognising where value lies within an organisation’s people structure is necessary before investment talks take place. Is it with a team within the business or is it with an individual? In some sectors, such as recruitment, client rosters and relationships carry a very high value and if the individual holding those assets leaves because of a merger or acquisition, the business could be seen to have lost value.
Investors should carefully examine the management structures of their target businesses and ensure that the current set up is strong enough to keep the business developing. Establishing what motivates the team can keep management satisfied and ensures that the business will keep moving forward, mitigating potential people risk.
Common mistakes made by investors post-investment often include not playing an integral role in the acquired business and not having a suitable 10, 30 and 100-day plan in place from the point of, or immediately following, acquisition. These plans should seek to address risk areas identified pre-investment and ensure the smooth running of the business. The post-acquisition planning phase should also take the long-term future of the business into consideration and, whether this takes the form of a three- or five-year plan, investors should have a distinct end goal in mind, such as sale or consolidation.
Undertaking successful corporate investments can be a key component to continually driving growth and investors should ensure they are well-prepared and equipped with the necessary knowledge to push these investments through.
For more information on the above or to enquire about Menzies Corporate Finance services, please contact Mike Grayer, Menzies Corporate Finance Partner by email firstname.lastname@example.org or by phone 020 7465 1964, or contact us below: