Should we acquire key parts of our supply chain?
As we enter a third year with the Covid pandemic continuing to dominate many aspects of corporate life, businesses with complex supply chains are looking to increasingly novel ways to ease delays and future pressures.
One of those measures is to create greater certainty by taking control of key elements of a supply chain through targeted acquisitions.
In November 2021 our survey of business leaders, Shaping your future, found that 52% of businesses are experiencing delays in their supply chains of up to six months. Over a third (34%) told us they are actively looking to acquire key parts of their supply chain to reduce those delays.
Our research is supported by a significantly increased deal flow in the last six months of 2021 with businesses looking to acquire a wide range of businesses in their supply chains, from specialist manufacturers through to staff recruitment agencies to ease key worker shortages such as HGV drivers.
It is at first glance an attractive proposition: suppliers are in your control providing greater security, there is a potential strategic advantage over competitors who may rely on the same suppliers, and there are welcomed additional revenue streams.
But, as with all corporate acquisitions it is not a decision to take lightly. It is a potential costly and time-consuming step to solve what is a relatively short-term problem, and complex supply chains may not be entirely eased via one acquisition.
Let us assume that a business has identified the supplier it wishes to acquire and they agree to sell. Business leaders will often under-estimate the time and effort needed to purchase and integrate a new business. They will need to be sure that the business can be acquired in a timely way to resolve the supply chain challenges before they might naturally resolve themselves, and they have the time to dedicate to integrating the new business without taking their eyes off the ball.
Next, look to whether there is the expertise inside the organisation to integrate and manage the new business. A manufacturing business, for example, may not have the expertise to successfully run a staffing agency business. If the senior management team in the target business choose to use a sale to retire or exit the business, the acquiring business may face a significant skills gap.
And there is the question of competitors. Will your competitors want to do business with a competitor? Will they see the new owners as a threat to their own business and move their business elsewhere? If they do, the value of the business being acquired may fall, leaving you potentially over-paying for the business. Any loss in revenue may not matter if that business is being acquired solely to provide certainty in supply chains.
Business leaders should also consider their long-term strategy and the impact a tactical acquisition might have. Businesses with a build a sell strategy will need to consider what future acquirers might make of such an acquisition? Will they, for example, see it as an outlier to the main business of little value or benefit. Will it hold back future investors who might struggle to see how it sits with the overall strategy and direction?
Funding acquisitions is unlikely to be a significant challenge if a business can demonstrate a strategic fit that contributes to the long term aims of a business. Private equity, family office investors and debt lenders have money to invest, but the rules of the game have not changed.
Businesses looking to acquire businesses in their supply chains would do well to first speak to an accountant or M&A adviser. They will challenge business leaders helping them clarify strategy, acquisition criteria, potential targets, approaches and deal structure to get an acquisition over the line.
If you would like to discuss the topics explored in this article, you can contact Jack Clipsham here.
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