If you want to build a business quickly then you need to consider acquiring businesses as well as building your own firm organically.  One local business, Escape, has experienced both first hand and Director Mike Bain discusses the issues of each when growing a business.

Escape is the north-east’s leading communications provider and has been recognised for its growth by Deloitte when it was the placed as the highest growing IT company in north-east in 2005 & 2006.  Escape was founded by Mike Bain & Robin Parkinson, who founded the firm in 1999 with £2,000 and no funding.  Within the first 2 years, it doubled its turnover and by year 4 reached a turnover of £1million

Mike explained:  “In 2004, we needed an effective solution to continue Escape’s level of growth and concluded that it would be by acquisition, as we felt this would be a faster, more successful method, than continuing with Organic Growth. Targets were identified in the local area that would increase Escape’s market share and provide the opportunity to ‘cross sell’ other products and services, such as telecoms and cabling, to the new clients.”

Ultimately, a small local IT company with approximately 50 clients was acquired by Escape in June 2004, assisting a rapid increase in turnover for the newly formed group from £1million to £2million within 12 months of completing the transaction.

Immediately Escape could access a wider customer base and offer these clients a wider choice of products and services - the success of the acquisition was highlighted quickly with a number of “new” clients immediately buying into the extra services offered to them by the enlarged group.  It would have taken a much longer period of time to penetrate these customers through sales techniques. 

“The actual growth in turnover following the acquisition was 50% more than predicted and we hadn’t envisaged how quickly our clients would realise the advantages of the additional services offered, which certainly added to the success of the acquisition.  As a direct result of this success, support was required from the bank to ensure the working capital requirements of the group could be met.  It was vital that we had a good relationship with our bank and legal advisor - without the appropriate advice and support, I would imagine an acquisition could be a risky alternative to some businesses.” 

Highlighting the risks associated with an acquisition is the fact that up to 75% of acquisitions do not succeed.  Many fail to deliver the anticipated benefits owing to poor post-deal implementation or shoddy diligence.  Escape had a trusted and respected Corporate Financer, Simon Cowie, to assist them through the whole process - it is vital that a good commercial law firm is there to access legal matters as well as a quality accountant for the financial side.  

“You can’t cut corners during or after an acquisition – it’s a big risk to take and when it’s your own firm that you’ve nurtured from the beginning, it can be a worrying time.  In our experience, we seemed to be a victim of our own success.  Our turnover was projected to increase by 50% but actually increased by 100% so the associated cash flow implications were the main issue.  Fortunately, due to the experience gained during the period of high growth in the first 5 years, the infrastructure was in place to deal with this.  I could imagine many businesses could really struggle in that situation.

“Acquisitions can throw up all sorts of issues – from hidden liabilities that can ruin the buyer to internal politics issues when people from both firms have to start working together.” 

Indeed, the most common mistakes during an acquisition revert back to people and communication.  The motive of profit can discourage internal managers from speaking out about their concerns during an acquisition and the failure to manage the ‘human’ integration can also cause problems.

“Internal and external communication is vital and all members of staff need to know what’s happening and why. PR was also an important part of ensuring the acquisition was communicated effectively and efficiently to all clients, staff and suppliers.  The local media was a great platform to inform new and existing clients of the acquisition and all levels of staff were kept fully informed of all developments throughout.  It also put an end to any rumours that may circulate amongst competitors or suppliers.

“For Escape, the acquisition was the most effective option at the time to achieve the growth the company had previously enjoyed.  The “brand” of Escape was established and respected within the industry which contributed to the success of the acquisition and the planning and implementation was carefully thought out. 

“Nevertheless, an acquisition is a risk and many experts actually proclaim the importance of organic growth above acquisitions. Organic growth is vital for long-term sustainability growth – while acquisitions are required to increase market advantage, truly sustainable long term growth can only be achieved by companies capable of growing organically.”