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RBA Finance

Business improvement

Business improvement is often associated with expensive business improvement consultants, but it need not be outsourced. An acquisition for example can be put on the agenda

Can a business improvement consultant add value to a business? How do you take a business from flat or single digit growth to double digit growth if it is, well, in the mature stage of its business life cycle? Business improvement can be a discipline applied by a business owner without necessarily employing an outside consultant. One way is to look at acquisition as a strategy.

Not always front of mind for business owners, acquisitions represent a viable strategy offering a business potential synergies, earnings enhancement and opportunities for superior long term growth. None of this comes without risks.

One example is a business which is a manufacturer of fast moving consumables with a turnover of $8.5m.

Challenge:

  • Stagnant growth; struggling to find angles to grow the market any further.
  • Was looking at accessing larger customers and interstate presence.
  • Had core skills in customer service, stock turns but had underutilised capacity.

Acquisition strategy

The business owner knew his competitor very well. In fact he saw his closest competitor, a relatively small, non core business of a public company, as a natural acquisition. The head company decided to divest as the business was no longer a good fit to its repurposed long term strategic plans. The target company had a turnover of $7.8m and gross margin of $3.4m and a (estimated) profit of around $650k pa. The business owner who clearly had some insight into operating costs, made an assessment of synergies to be gained if the two businesses were merged. He conservatively estimated an annual benefit to the combined company if $1.2 m pa.

Negotiations commenced and a final price negotiated was $2.2m which included $1.4m of working stock. On face value the forecast ROI for this acquisition was 54.5%; an exceptional rate of return where there was a greatly ameliorated risk profile due to the business owner already knowing the industry.

Further synergies and benefits were gained due to gains achieved in stock turn. The target company’s stock was turning no better than three times per year and my client had a major advantage as it had the systems and ability to turn stock at a minimum of six times pa; which had the effect of reducing the target stock from $1.4m to around $700k within the first five to eight months. This effectively reduced the overall investment outlay by $700k meaning the net investment was $1.5m with a $1.2 m pa contribution to the business.

The adjusted ROI increased to 80% in addition to giving the combined business the national exposure they required to secure their future and add new products. The real clincher to the deal: the parent company vendor agreed to generous terms: 50% on purchase, the balance 12 months later based on an earn-out formula which favoured the new buyer. Now what lender would not back that transaction?

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