I can spill the beans about this great big strategic idea of mine now, because we’ve decided to abandon it, after realising that we really had to focus on our core product offering and the launch of the site.
We’d found out that there was a company for sale in a related field to ours, selling software to childcare organisations. It had gone into liquidation, so obviously wasn’t in a good state. However the software itself really appealed to us, plus the skills and contacts of the former directors, who may have been willing to be involved with the handover.
I felt that the pricing of the software, and the business strategy in general, was completely wrong. The former directors had their hands tied a bit due to having to recoup their overheads and costs of development, so if we could start with a clean slate, I was sure we’d be able to use this software, and the customer base, to develop our own company as well.
The synergies were fantastic, and in theory it would have made an ideal acquisition for us. However, after spending the last few weeks on this, I think it’s still going to take quite a bit of time investment from us, which detracts from developing the site and our existing business, so we’ve decided to walk away.
The timing of this was awful too. The bank are bound to be nervous that we haven’t even started trading yet, so are going to be reluctant to lend us further funds to purchase any further assets, and whilst there are potentially other ways to finance the deal, at the end of the day you’ve got to admit that the bank have every right to be nervous. As much as it pains me in a way, I’ve got to walk away from this one.
My background is corporate finance, and I’ve assisted countless companies to buy businesses, so the process itself doesn’t worry me at all, in fact it’s quite exciting!
It’s generally accepted that there’s always a higher risk of acquisitive growth than organic growth – i.e. buying a company to grow your business quickly, rather than just waiting for the natural, but usually much slower, growth of your own businesses.
However, as long as you do thorough due diligence, investigating all the risks, financial, commercial, operational, legal etc, then you can make a judgment about whether you are willing to take those risks. But you need to be able to make an informed judgment with as much knowledge as you can get.
Our risks were mainly operational and commercial. I was fairly confident that my financial projections were achievable, based on the existing customer base, and my (albeit limited) research of their market and reputation.
The legal due diligence would have been taken care of by Nick (our lawyer), and if we couldn’t prove title, trademarks etc, then the deal would never have happened anyway. So that didn’t concern me either.
Our biggest worry and risk was the investment of management time, both during the acquisition process itself and after we’d bought the assets. The knowledge gap was considerable, and we’d have needed my time, Ross’s time and Lee’s time to understand the software/technology, the market and customers.
This market, despite huge potential for growth, is governed by legislation and public policy that I’ve never had to get to grips with before. So these would all be key areas for us to spend time on.
After tracking down the liquidator, we made the initial approach, and found that they had appointed a sales agent, who duly forwarded the information pack. After a few questions back and forth, we then took part in a conference call two weeks ago with the liquidators, the sales agent and one of the former directors, and were generally quite happy at that point. So we put together a business plan and made a conditional offer.
Our conditions were the usual ones, subject to raising sufficient finance and satisfactory completion of all due diligence. However we added in one more condition, which concerned the involvement of the former directors.
They had said they were willing to be involved on a consultancy basis to assist with handover; however I was insistent that if the acquisition went ahead, it had to be as part of some sort of partnership with the former directors. I didn’t want them to be involved as a temporary measure.
In my view, we needed them on board permanently, taking responsibility for running and developing that division and reporting in to the main board.
I’d hoped they would be keen, as they wouldn’t have to walk away from something they’d spend years of their lives developing, and yet wouldn’t have the full responsibility of running a business. This was the only way we would have reduced the largest risk we’d identified.
I’d based our offer on just one year’s worth of earnings (i.e. profits). Businesses are normally valued on a multiple of earnings, so if you offer four times earnings, you are effectively saying you are prepared to wait for four years before you get your investment back.
Because of the risk associated with the insolvency, and therefore the potential damage to the brand with both its existing customers and the wider market, I wasn’t prepared to wait any longer than 12 months.
Also, due to both the technological nature of the product, and the legislative nature of the sector, I didn’t want to assume that we’d be able to use this product in its current state for longer than one year either.
Ideally we wanted to bring it online, linked to our website, but after Lee had a conference call with the company’s IT contractor, it became obvious that this wasn’t going to be a simple process. We’d have to invest further considerable time and money to develop this product for the web, so it then becomes another investment decision.
The sales agent informed us that our offer was ‘sound and not unreasonable’, however the deadline for accepting offers was extended several times, as he was waiting for a further offer, from a ‘late entrant’.
This meant that it was getting closer and closer to our planned launch date, and it began to concern me that the process itself was just going to drag on and so distract us from other things we could be doing to develop and promote our own business.
On top of this, the directors did not appear to want to be involved in any form of partnership or permanent position, and while we may have managed to negotiate something that suited everyone, it wasn’t going to be a quick process.
