Your business is growing, you want to expand and you are considering taking over a company that you think will fit ideally with yours. But where do you find the money, are you paying the right price and are the company’s books clean?
These are all key questions for expanding businesses, especially those operating in high-risk areas where investors struggle to make money and are more reluctant to commit funds, says John Gilligan of chartered accountancy firm PKF.
“The high tech businesses get the most attention but they are difficult to make money on and investors are now targeting small trading companies,” he says.
Mid-market
Advertisement
The international mergers and acquisitions market may be booming and making millionaires of City M&A advisers but it is a different story for mid-market companies trying to expand.
“There are lots of different markets and the mid-market [where companies are valued at up to £100 million] is busy but not booming,” Mr Gilligan says.
Private equity from a range of sources including US, UK and European pension funds and very wealthy individuals funds 50 per cent of take-over deals.
According to the British Venture Capital Association (BVCA), more than 1,600 mostly medium-sized companies are being financed by private equity firms, generating an estimated £187 billion of sales in 2004 and employing about 2.7 million people.
Government backing
Advertisement
Attempts to provide finance for expanding businesses from public funds have met with mixed success. The Department for Trade and Industry (DTI) has been experimenting with a series of regional funds but take-up has been slow.
Funding has been restricted to specific geographic areas and money has been waiting unclaimed because there were no suitable businesses to spend it on.
Mr Gilligan says: “There is a recognition that there is a lack of funding for small businesses in the UK but [the schemes] are bureaucratic which creates a lot of hassle for the recipients.
“The issue is how do you use public money to fund business? The DTI doesn’t want to risk public money unless it does economic good and creates jobs.”
Fund managers are now being asked to bid to run a new venture capital fund and the DTI is easing restrictions on how the funds are distributed.
Advertisement
Right price
Apart from having to find the money for an acquisition or management buyout, firms need to understand the market so that they can pay the right price for a target company. “It’s a myth that you can sit in isolation in an office and add two figures together to get a valuation,” says Gilligan.
He believes that there is plenty of scope for firms like PKF to grow their acquisitions advice services for mid-market companies.
“The big four accountancy firms do relatively large and relatively few acquisitions. Firms like ourselves and boutique companies specialising in specific sectors like media or IT operate in the mid-market.”
Unlike the boutique companies, however, PKF does everything from negotiating and structuring a deal to finding sources of funds and carrying out investigations into a target company’s books.
Advertisement
Such investigations range from what Mr Gilligan calls the “toxic” - uncovering fraud in a target company’s books - to the “benign but valuable,” where profits have been underestimated or overestimated.
Mr Gilligan says that PKF will also handle a company’s tax affairs and provide accounting services. The range of businesses and markets is wide and varied. Two of Mr Gilligan’s most recent jobs have been to raise money for a company making dental implants and to handle the merger of two property companies.
“We aren’t just offering advice, we’re offering a complete service. Acquisitions are a growth area for us,” he says.