Building up an acquired distressed business from scratch to generate organic growth is great if you can pull it off but bolting on can be quicker and easier for those who are lucky enough to already be running successful businesses.
The most successful acquisitions of distressed businesses are often undertaken by buyers with existing businesses. Instead of viewing the struggling business as a separate entity, they may see it as an asset that can be bolted onto their existing enterprise. In some situations, buyers will purchase a distressed business solely for the assets that can be bolted-on to their own company, helping them to grow and ultimately become more profitable.
Here, we look at this approach to buying distressed businesses and examine bolt-on acquisitions in a little more detail.
What is a bolt-on acquisition?
When buyers are looking to make a profit from a business acquisition, they often look for entire businesses that they can return to profit. However, for those who already own businesses, it can often be a more sensible approach to keep an existing business running and ‘bolt on’ the acquired business, or at least some of its assets.
This is particularly relevant when looking at buying a distressed business out of administration. Administrators are often keen to offload the assets of a collapsed business. Savvy investors will buy these up and bolt them onto other businesses to open new market, boost capacity or facilitate other routes to growth.
Unlike other strategies, bolting on acquired businesses can result in immediate growth through extending geographical reach, acquiring new customers or contracts, expanding manufacturing capacity or attracting new markets, for example. All this can be achieved with minimum time and effort for investors who spot the right opportunities for a bolt-on acquisition.
How do you spot a good bolt-on opportunity?
Very often, bolt-on opportunities can be found in industries that are ripe for consolidation. If you look in the right places you might find a great number of businesses operating in a similar way and offering the same products or services. If you are also operating in said industry and spot a failing rival at the right time, purchasing that rival and bolting it onto your more successful operation can result in immediate growth. It goes without saying then, that looking at the industries within which you already operate is the first port of call when considering a bolt-on acquisition.
Another approach is to consider businesses that have fallen into administration and the assets that could easily be integrated with your existing. Administrators will jump at the chance to sell the assets in exchange for cash that can be used to repay creditors.
A recent example of such an opportunity is the Lincolnshire-based interiors fit-out firm, Tienda, which fell into administration in January 2019. KPMG were called in as administrators to the firm, which had fallen into difficulties after experiencing cash-flow challenges, according to KPMG.
The business had to pull the plug after failing to secure additional funding or investment to overcome the cash flow challenges. However, KPMG’s Chris Pole explained: “We are seeking buyers for the company’s assets and would invite interested parties to contact us as soon as possible.”
The business has live contracts and could be a great bolt-on opportunity for an owner of another interiors and fit-out business.
Cherry-pick for success
Making a successful bolt-on acquisition can often come down to identifying the potential drivers of growth within distressed businesses and cherry-picking them. These drivers of growth could be anything from machinery, staff, IT, or physical business operations in new geographical regions.
Strategic buyers need to have their eyes open in order to identify these assets and acquire them at the right price.
How do you successfully bolt-on an acquisition?
Successfully integrating an acquisition to an existing business comes with its challenges. Here are several factors that are often central to a successful integration:
Cost synergies can be achieved in various ways when bolting on an acquisition. The cost of goods might reduce simply by increasing volumes, for example, or overheads might fall as a result of the acquisition.
Other synergies can be achieved in situations where sales can be boosted for the smaller bolt-on business by gaining access to the purchasing business’s larger customer base or distribution network, for example.
Ensuring cultures are compatible
When considering a bolt-on acquisition, some thought should be put into whether the new business can fit with the existing business from a cultural perspective. Anyone involved in mergers and acquisition will be aware of the importance of cultural compatibility, and the same rules apply to smaller bolt-on deals.
Although it is sometimes difficult to pin down exactly what a company’s culture is, it’s helpful to look at the values, beliefs and working practices used in the target business. Do they align with your existing business culture? Are working hours similar or at least adaptable? Is the working environment compatible with that of your existing business? Were the values imposed by the management similar to your own?
Realise the importance of staff
If your acquisition brings new staff into your organisation through the bolt-on, do not underestimate the challenges or the opportunities this can bring.
The staff members are likely to be extremely unsure about their future and being upfront and honest with your communication with them will pay dividends in the long run. Good communication can go a long way in engaging them and developing loyal relationships with them.
The staff that come as part of a bolt-on acquisition might be considered as an after-thought but can soon become one of your business’s greatest assets with the right leadership, understanding and development opportunities.
You must be the right kind of buyer, with the right existing businesses and expertise to make a success of a bolt-on acquisition. However, if handled correctly, this can be one of the quickest and most effective routes to growth.
Keeping your ear firmly to the ground essential. That diamond in the rough is also likely to be shining bright to your rivals…