Richard Hayward, at HHMC Australia on exercising buying power.
There is an old adage that there are no shortcuts to growing a business; it comes through hard work and keeping your customers happy. There is no doubt that hard work and customer satisfaction are essential, however, there can be short cuts to achieving growth and creating value in an increasingly competitive market.
Business acquisitions are often considered the domain of the larger companies, though the benefits of targeted expansion can be readily achieved by small and medium sized organisations who can gain far greater (and more timely) growth than otherwise. Sensible, strategic acquisitions by SME recruitment companies will often prove not only to be a quicker route to growth but more cost effective than the investments needed to ramp up with new staff in new office locations or market segments. The organic route to growth in different geographies can be very demanding on management time and the experience of regular staff turnover immensely frustrating. It can look like a step forward and a step back process at times.
The difficulties in finding the right staff and in managing new office start-ups remotely has challenged many otherwise successful staffing companies. It is distracting to SME recruitment managers to have their focus split between existing offices and new geographic operations. Not surprisingly this can lead to a decline in the performance of the ‘home’ office not to mention the toll it can take on the manager as well. Alternatively, acquiring a business that meets pre-defined criteria should result in an appropriate return on investment that adds profit, clients and staff with relevant location or sector experience. Strategic or synergistic acquisitions may be made in related or complimentary fields that capitalise on the nature of their existing distribution channels. For example; a staffing agency with the common difficulty of gaining meaningful time with HR leaders may see an acquisition of a business that deals directly at a valued level with corporate HR decision-makers, as an attractive proposition.
Acquisitions do need this strategic basis. Organisational leaders have to ask ‘in what way is our company better positioned as a result of this planned acquisition?’ The answer may be that it brings greater capability to exploit other market opportunities; it brings measurable improved value to the bottom line; it may be that it will increase the attractiveness of the buyer’s business in turn to a potential buyer, or for other strategic considerations. Benefits from merging back-offices and increasing productivity through streamlining support operations can also be a valid reason to approach an acquisition. Financial benefits can accrue quickly and achieving economies of scale can be a significant way to increase shareholder returns. In each case the rationale for the business case has to stack up. When it does the arguments to move forward are substantial. Not many business activities are risk free and of course that applies to a business acquisition.For staffing companies it does make business sense to buy another company if:
- It results in the acquisition of a strategic asset or capability that (looked at realistically) is more difficult or costly to build internally
- It enhances growth beyond what the core business can deliver on its own
- It can be acquired at a realistic market price and deal structure
The risks in acquiring any service business that is as heavily dependent on key people as recruitment start with the obvious; what happens if the key people leave? Outgoing owners can be tied in through the deal structure for a period of time, however, that is not so easily done with staff. While every buyer wants to have the key staff remain on board, the insecurity that the prospect of change creates can drive people to look elsewhere. The loss of key people can mean the subsequent loss of clients or at least a reduction in business volume.
Acquisitions can be demanding events for a period of time. They don’t always run according to plan and can become a distraction on the management team. Acquisitions need to be managed well with postacquisition activities just as important as the deal negotiations that take place beforehand.
The issue of paying a fair market price is sometimes treated a little subjectively when two parties are negotiating directly with each other. What is fair in a buyer’s mind can be quite different to a fair price to a seller. This is often best determined with experienced third party input. Although many of the pitfalls associated with making a business acquisition can be overcome with planning and access to the right professional advice it is important that any process commences with an understanding of the outcome that is desired.
It is critically important to be able to visualise and describe the way you want your business to be after an acquisition. That way finding the right target companies becomes a lot clearer. When done properly acquisitions can fast-track growth by years and add genuine value to the business.
Article written by Richard Hayward and originally published in Global Recruiter March 2015