Steinbeis experts support SMEs with expansion strategies and financing growth
Many in Germany associate corporate takeovers and acquisitions with companies listed on the DAX (the stock market index in Germany). For medium-sized enterprises, acquiring another business presents an enticing opportunity to expand and enhance the company’s competitive position. Bekim Asani and Steffen Tutschka of Steinbeis M&A Partners have a wealth of experience in this area. The two experts outline pivotal factors critical to a successful takeover.
Sometimes company takeovers take place as part of a strategic plan, sometimes they arise by chance, for example because a strong competitor suddenly comes up for sale. SMEs should ensure they don’t miss out on such opportunities, especially given recent hikes in interest rates and falling company valuations, not to mention megatrends such as demographic developments, digital transformation, and environmental, social, and governance (ESG) factors. In the current economic climate, identifying suitable acquisition targets is undoubtedly challenging, particularly since the objectively declining valuations of attractive companies may not present compelling arguments to prospective sellers.
An advantageous situation for SMEs
Yet this is precisely where the opportunity lies. Investors that prioritize financial factors often have to base the purchase price they offer on a stand-alone view of the acquisition target. This contrasts with SMEs, which are in a good position to include strategic acquisition considerations in their assessments. When it comes to competing for interesting acquisition targets, Bekim Asani and Steffen Tutschka believe that SMEs are particularly well poised to come out on top. A prerequisite for this is that they are also able to offer sellers plenty of reassurance regarding the likely outcome of a transaction. For SMEs wanting to prepare properly for such opportunities, it is worth first analyzing their own financing options or debt capacity as a company in order to align the results of this assessment with their expansion strategy.
Calculate the acquisition costs
One important question the Steinbeis experts are often asked about mergers and acquisitions (M&As) is how much a medium-sized enterprise can afford to pay – or should allow itself to pay. Such questions can, in part, be answered by looking at so-called debt capacity. This takes into account the structures of acquisition funding that are currently feasible on the market in order to work out how high the providers of debt capital can go with their financial contributions toward a company acquisition. Among all the factors considered for this analysis are corporate and financial planning, current corporate financing, and the free cash flows that will be generated in the future, not only by the company itself but also by the potential target company.
The analysis shown in the table above offers a highly simplified assessment of how to use debt capacity to analyze and evaluate M&A options in the midmarket sector. The example shows how a business owner ascertained that there will be short- to medium-term opportunities to take over three interesting competitors arising from unresolved company succession issues. To prepare for future negotiations and position the company more effectively, an analysis is conducted of its specific potential to finance the acquisition of competitors. The first step of this analysis involves drawing on numbers in the public domain, as well as industry forecasts and the company’s own expectations. This should also include, among other things, considerations relating to the current financing arrangements of the companies being scrutinized, as well as available liquidity.
The example, which is typical of the kind of projects the Steinbeis M&A experts work on every day, shows that essentially, having taken the earning power of the acquisition targets into account, it would be possible to acquire any of the competitors under consideration. Based on the assumptions made and depending on the target business, the new overall company could, on completion of the takeover, sustain total liabilities of between 15.8 and 21.7 million euros. Taking into account the current debt load, the availability of liquid assets allocated for the acquisition, the extent of planned investments and dividends and, in particular, the strategic fit of the acquisition target, it should now be possible to make plausible initial estimates of the purchase price of the target business and, if necessary, start coming up with ideas for financing concepts.
Setting priorities and expanding
Extending this analysis to include a comparison of key financial indicators, if necessary also taking into account any efficiency gains that can be leveraged, potential acquisition targets can be ranked meaningfully according to financial attractiveness. Companies in a strong position can take advantage of the current business environment to drive corporate development through strategic acquisitions and strengthen their competitive standing. The team at Steinbeis M&A Partners is available to provide support with such undertakings. In addition to helping SMEs analyze the competition, the Steinbeis experts also assess options in the event of a takeover.