Why acquisitions are a smart way of growing your SME

25 merger and acquisition tips for SME entrepreneurs

Mathieu Luypaert

By Mathieu Luypaert

Professor of Corporate Finance

17 April 2024

When it comes to growing your business, there are various options, each operating at its own different pace. Organic growth is usually slow and requires a lot of energy. To get ahead faster, mergers or acquisitions are often a good choice. According to Mathieu Luypaert, Professor of Corporate Finance and M&A, ‘we are still seeing a lot of untapped potential, particularly when it comes to SMEs. I’m convinced that many of them would be able to grow both faster and smarter were acquisitions also on their radar. It’s not just a question of scaling up – there are also the benefits of synergies to consider. I see a lot of fear around initiating the acquisitions process, with many SME owners/managers not really knowing how or where to start’. To that end, Mathieu invited three entrepreneurs and two investors to attend a breakfast meeting session as part of Vlerick’s annual Mergers, Acquisitions & Buyouts Conference – and they shared the lessons they have learned.

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How do you prepare your business for an acquisition?

  1. Professionalise, ensuring you are sufficiently prepared for the process: educate yourself in business operations, keep up with what is going on in your sector and regularly listen to voices within your own business.
  2. Work on your network and make full use of that network when necessary.
  3. Recruit capable (or more capable) employees with more or different knowledge. As the manager, you can’t do and know everything yourself.
  4. Invest in an ERP system, along with related IT and operations tools, to keep the basics running smoothly in the event of unexpected hitches during the acquisition process.
  5. Surround yourself with experts. Set up an advisory board of individuals who have a feel for business (not family or friends) and actively listen to their advice. Alternatively, bring in an M&A consultant to confide in and support you during the acquisition process. External experts will help you keep your cool and play the game more knowledgeably.
  6. Formulate a clear plan: try to achieve strong value creation, ensure your free cash flow is reasonably predictable so that the business keeps going when your time and attention are taken up by the acquisition process, and determine the goal of the acquisition in advance (e.g. to acquire a dominant market position to eventually become an attractive takeover target for a larger player yourself).

    How do you find the right target(s)?
  7. Go in search of them proactively. This is often cheaper than waiting until you find yourself a bidding war with other players, which tends to drive up the valuation of the target in question.
  8. Start by mapping out all the players in your sector. Institutions such as sector federations or FIT can help you create lists of players, even outside Belgium. Next, work on your network. Make yourself known, call people up and go for a coffee with them. If you keep your eyes open, something is bound to turn up. Opportunities only present themselves if you are actually looking.
  9. Patience is a virtue. A good conversation or contact might only lead to an offer years down the line, but at that point you will be ‘top of mind’, as the good cultural and personal fit will have already been established. Don’t make your decision too hastily – dare to take the plunge and move forward only when the time is right.
  10. When you’re searching for a target, look beyond your direct competitors. Besides grouping roles, production or purchasing power to strengthen your position and size, an acquisition can also expand your own offering to include complementary services or products that serve the same target group. A business with an opposing cycle of peaks and troughs could also offer an attractive target.
  11. Make sure to be sufficiently selective. An acquisition should not be an end in itself, rather a means to an end. Moreover, be prepared to put more money on the table for a target that is both unique and strategically important.
  12. Think about having a BATNA (Best Alternative to a Negotiated Agreement). Make sure you always have a second choice waiting in the wings. If you don’t, you may find the other party senses during negotiations that you can only go one way, which can put you at a disadvantage when negotiating the conditions of the acquisition.
  13. Listen to your gut feeling. Figures are figures, but it’s ultimately about people. Try to find out who you’re getting involved with and whether those relationships are going to work. After all, people buy people.

    Traditional bank financing versus private equity
  14. Cultivate a positive and open relationship with your banker and communicate regularly. The chances are that you’ll need a banker at some point to facilitate your growth process, so give your banker full insight (e.g. by reporting your quarterly figures) and don’t provide them with last minute figures (good or bad). Think of your banker as a relationship manager and your ambassador within the bank itself – the better your banker knows your case, the better they will be able to defend your interests internally with regards to the credit committee.
  15. Don’t forget about other players (e.g. the PMV, which supports economic investment initiatives in Flanders), as these can act as guarantee funds towards the bank.
  16. Private equity (PE) is a whole different ball game, requiring a different pitch and subject to its own rules. If you are looking for a sparring partner and sounding board as well as financing, PE is a good choice. PE investors like to get thoroughly involved as equal partners as part of the acquisition process. Another attractive benefit for entrepreneurs is that you get access to the PE player’s entire network.

    How do you choose the right PE investor for your business?
  17. Research the reputation and track record of the investor you have your eye on. Think about how the investor’s seriousness and weight could also help your business in the long term through any subsequent rounds of investment.
  18. To add value, there must be a fit, both personally and in terms of the level of support you can expect. 1+1 has to equal 3. If that click is not there right from the first negotiations, you’d do better to walk away.
  19. Start by doing your homework and listing your own expectations – and discuss those expectations fully in advance. This is the only way to create genuine added value for both parties. Do you want a minority or majority stake? Are you planning to make a lot of acquisitions in the short term and then sell, or are you looking for a long-term collaboration? How far do you want to go in terms of the level of debt? And would you prefer a lot of operational interference or not too much? If you are someone who prefers to stay in control, make sure you commit to informing the investor transparently, proactively and frequently about how the business is evolving.
  20. Determine your M&A strategy in advance and set out the agreements made in a shareholder agreement. Put down on paper your respective commitments as entrepreneur and investor. Of course, you can relax these agreements later on if necessary (timing, size, region, etc.). While agreements do lead to fewer arguments, having a purely ‘on-paper’ agreement won’t work if you don’t genuinely see eye to eye.

    When are you ready to sell your own business?
  21. When your business has professionalised to a sufficient extent, with the right employees in place, so that it can be successful independently of the entrepreneur.
  22. When market conditions are optimal, allowing you to really ‘force’ a sale – consolidation with a strategic partner can help the business cope with shifts in the market (e.g. digitalisation).
  23. When your business is valued at an amount that feels appropriate.
  24. Selling your business doesn’t mean you have to hand it over completely. You can negotiate to return to the business after the sale and regain ownership of a certain percentage. However, anchoring the business with a strong parent organisation can give an entrepreneur more breathing space and financial peace of mind.
  25. Always keep 200% focus on your current business. An acquisition process can easily take six months or more, and it demands a lot of preparation and energy. If you lose focus on your day-to-day business, your revenue may decrease, which also affects the conditions of sale.
Vlerick Learning Festival 2019

Ready to learn more about mergers, acquisitions and buyouts? Come and join us.

Vlerick’s Centre for Mergers, Acquisitions & Buyouts develops and collates insights and best practice from across the M&A field – covering everything from the end-to-end deal process to financing and integration. The Centre brings its research and knowledge together to share with anyone involved in mergers, acquisitions or sales. 

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Mathieu Luypaert

Mathieu Luypaert

Professor Corporate Finance