Breakup value may be greater than going concern value
Whether you buy a company to run yourself or to consolidate into a group, you should be looking at what assets the acquired firm has which are redundant to the acquisition objectives. The disposal of such assets can assist to fund the acquisition. By doing some clean up of the business, you might also create a leaner, more easily managed operation.
Mature firms often take on activities over time which, while needed at the time, are often badly managed as they don’t fit with the core activities of the business or, some years later, can be outsourced to other firms which can do the job better. An examination of a target business should focus on the fundamental purpose for the acquisition. The normal objective is to acquire a specific capability or capacity. The next level of analysis should be to identify which business assets and capabilities are needed to support that objective either to ensure its transfer across to the buyer or to support it as an on-going business. Once this analysis is complete, other assets or capabilities which the target firm has can be consider redundant to the main objective and should be considered for disposal.
Part sale of assets could fund the acquisition
The sale of such assets or capabilities can often provide a much needed contribution to the funds required to finance the acquisition. Using the proceeds of target firm asset sales can also reduce the drain on internal funds or reduce the need to source external finance. Very few acquirers have the funds to make a significant acquisition without resorting to external loans or new equity injections. By leveraging surplus assets of the target firm, the acquirer can reduce the impact of such external finance.
Even if surplus assets or capabilities are not sold off, the business might be easier to operate if parts were closed down. Often older businesses continue with activities even when they are making a loss or not contributing a fair return on investment or effort. An objective and, often, unemotional review of the business will identify such activities for closure.
Another possibility which should be considered is that some activities might be better transferred to another business entity within the group of even placed with an outsourced firm who can manage it better. Sometimes equipment and plant should be sold off and replaced with more advanced equipment which has higher productivity, newer capabilities or is less expensive to operate.
Look for opportunities to create a more effective business
Another consideration for the buyer is that the acquired firm may be able to undertake some of the parent’s activities at higher levels of productivity or with better results. Under consideration should be the sale of assets or capabilities of the buyer where activities can be transferred to the acquired firm. This process can also lead to higher consolidated profit and also help generate funds for the acquisition.
The important consideration here is that the sale of assets or the closure of activities in both the buyer and seller businesses should be part of an overall acquisition evaluation process. The focus should be on what best contributes to making an efficient and effective outcome. A byproduct is that it may well provide funds for the acquisition and/or make the subsequent businesses more profitable and easier to manage.
