Client: Manufacturer of fast moving consumables.
Turnover: Turnover of $8.5m.
Challenge:
- Strategic issues. Struggling to find angles to grow the market any further.
- Was looking at accessing larger customers and interstate presence.
- Had core skills in customer service, stock turns but had under utilised capacity.
Our Strategy:
We decided to target our client’s closest competitor who had larger customers but had lost direction and support from its parent company. This was a relatively small non core business of a public company who had decided to divest. The numbers of the target company were turnover of $7.8m and gross margin of $3.4m.
The actual profit of the target was not disclosed in this instance but it was calculated to be around $650k pa. (As these were very similar businesses we could model the costs and savings fairly accurately).
After careful consideration of the client’s capacity and calculation of the potential savings via integrating the target business into the clients business it was conservatively agreed that the annual benefits to the client would be $1.2 m pa.
Outcome:
The overall price was finally negotiated to be $2.2m which included $1.4m of working stock. On face value the planned Return on Investment for this acquisition was 54.5%, not bad for a business and industry that my client already knew and hence reduced risk.
To further improve the result, the target company’s stock was turning no better than three times per year and my client had a major advantage as it had the systems and ability to turn stock at a minimum of six times pa.
We calculated it could reduce the target stock from $1.4m to around $700k within the first five to eight months. This effectively reduced the overall investment outlay by $700k meaning the net investment was $1.5m with a $1.2 m pa contribution to my client.
The adjusted Return on Investment increased to 80%.
The target company also held two national accounts which transferred with the business sale and gave my client the national exposure they required to secure their future and add new products.