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2021, the year of the bolt-on acquisition?

In the face of another year impacted by COVID-19, we explore the opportunity presented by bolt-on acquisitions, which we’ve seen increase in popularity among businesses looking to grow in the current climate. 

Last updated: 7 January 2021

There is no doubt that the last year has been tough on businesses. With many having to constantly adapt to new rules introduced with minimal notice, particularly those operating in the travel, leisure, retail and food & beverage sectors. However, there have been a number of businesses that have successfully weathered the storm, finding themselves in a strong position and looking to focus on growth for the year ahead.

In my discussions with many such businesses, I’ve noticed that currently there appears to be an increased appetite for making bolt-on acquisitions, these being smaller acquisitions, typically operating in the same or a similar line of business and thought to represent less of a risk in what is still an unpredictable business environment. Some of this demand is being driven by businesses that are private equity backed already, meaning they have easy access to funds and an even greater incentive to grow. 

Here, we explore the key advantages of bolt-on acquisitions, as well as the importance of thorough due diligence to minimise the risks to your business. So what are the key benefits of these transactions, and should your business consider it?

About the author

George Thresh

+44 (0)207 710 0935
threshg@buzzacott.co.uk
LinkedIn

Last updated: 7 January 2021

There is no doubt that the last year has been tough on businesses. With many having to constantly adapt to new rules introduced with minimal notice, particularly those operating in the travel, leisure, retail and food & beverage sectors. However, there have been a number of businesses that have successfully weathered the storm, finding themselves in a strong position and looking to focus on growth for the year ahead.

In my discussions with many such businesses, I’ve noticed that currently there appears to be an increased appetite for making bolt-on acquisitions, these being smaller acquisitions, typically operating in the same or a similar line of business and thought to represent less of a risk in what is still an unpredictable business environment. Some of this demand is being driven by businesses that are private equity backed already, meaning they have easy access to funds and an even greater incentive to grow. 

Here, we explore the key advantages of bolt-on acquisitions, as well as the importance of thorough due diligence to minimise the risks to your business. So what are the key benefits of these transactions, and should your business consider it?

Geographical reach

Geographical reach

Bolt-on acquisitions can be an effective way to rapidly unlock a new geography. This could be small scale, for example an architecture firm based in the south of England looking to quickly expand into a Northern city using an acquisition to ensure it has an instant client base and strong local experience.

At the other end of the scale, it could be used to gain access to a new country or continent. Just recently I worked with a European based security company that was looking to make a UK acquisition to do just that. Brexit may make this an even more attractive proposition if the agreement reached doesn’t allow for the level of access to the European market that UK-based companies are looking for (or vice versa). 

Additional service lines or specialisms

Additional service lines or specialisms

Another benefit of bolt-on acquisitions is the ability to add a complimentary specialism to your offering to make it a more attractive overall proposition. Rather than taking the risk of building up a new specialism from scratch in an uncertain economic environment, it is now more appealing than ever to take a shortcut with an acquisition.

I recently worked with a software developer who was looking to add software integration and project management specialisms to present a more complete offering to clients. Wisely, when looking for a bolt-on acquisition, they were targeting established businesses with a proven track record in delivering such services.

Increasing market share of existing service lines

Increasing market share of existing service lines

Sometimes an acquirer will simply look to make an acquisition to strengthen an existing service line, whether this be through increasing client book, manpower or general market share.  Particularly in the current environment, smaller competitors may be more inclined to consider joining a larger firm to help them avoid running into financial difficulties. 

With all of these benefits and opportunities for growth, it’s easy to want to jump straight in. But don’t forget to do your due diligence.

The importance of due diligence

The importance of due diligence

As is the case with any acquisition, there will always be risks involved. Thorough due diligence should be carried out to help reduce these risks and improve your overall understanding of a target business. Businesses of a smaller size can often have poor quality accounting records, so it may be necessary for your due diligence provider to take a more in depth role, working with the target to extract the information required.

In one extreme example we provided due diligence services for the acquisition of a US target that had no accounting records other than bank statements. We had to extract data from these statements to build a set of accounts on the cash basis, and then use these accounts to perform our diligence work. These services provided assurance to our client and helped to reduce the risks associated with the transaction, which is vital in the current climate.

Looking for more information?

Looking for more information?

If you’re considering a bolt-on acquisition, or if you have any questions about the above, please get in touch. Our Corporate Finance team provide due diligence services across a wide array of sectors. We also have a network of venture capitals and private equity firms that we can connect you with if you’re looking for funding to grow your business.

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