28 February, 2022
When growing a business there are a number of routes to consider. Whether it be organic growth over time or expanding quickly through mergers and acquisitions (M&A), it is important you carefully consider the options and ensure you have taken the necessary specialist advice.
Organic growth sees a business develop naturally. This option could see a business opening new factories to reach wider markets, increasing sales through marketing, investing in new cutting-edge machinery/technology, development of manufactured goods, developing skills by employing experienced workforce and/or training the existing workforce. Whereas, growth through M&A can see a business grow very quickly as it involves a company acquiring other businesses and/or companies, that will complement the products/services that it already provides. For example, the Dutch paint/coatings manufacturer, 'Akzo Nobel', has grown significantly through strategic bolt-on acquisitions of other companies, such as British chemical company 'Imperial Chemical Industries' - upon acquiring 'Imperial Chemical Industries', 'Akzo Nobel' immediately owned 54% of the market share in the UK paint market (including well-known brands such as 'Dulex' and 'Crown Paints' which, at the time, were subsidiaries of 'Imperial Chemical Industries'). Because the company/business is already established, the acquisition can open up new markets/revenues, bring on board a skilled workforce, and bolt-on new assets (plants/machinery/property) - all of this can happen overnight with M&A.
Organic growth takes time and whilst it does not involve a Corporate transaction in your typical sense, you may still require legal support to ensure that your company and its members are sufficiently protected. You will still need a business plan as to how you are going to grow organically and cannot rely on growth just happening over time - it still needs positive action from its members and directors to effectively grow.
There are a number of things to consider from a legal perspective when growing organically, including (amongst other things):
Whether you want to separate the different income streams of your company or protect your assets across different entities, there are various ways in which you can structure your company. This could include implementing a simple holding company structure or having a larger group structure with multiple subsidiaries, in any event specialist advice should be sought on the best option for your company.
You should ensure constitutional documents, such as your Articles of Association and Shareholders Agreements, are up to date and provide sufficient protection for the shareholders of the company. This will also ensure you have clear decision-making processes in place for the members and directors, to ensure everyone is running the business in line with the business plan and everyone is on the same page with regards to the growth of the business.
You may need to consider funding as part of the organic growth plan, to be used towards recruitment, purchasing equipment and/or property. You should consider the different options available to you and what security requirements come with this and how this will in turn affect the future growth of the business. This may also involve investment opportunities which could some equity of the company being given away.
M&A will require even more thought and planning so that you can select the best opportunities for your business, when they become available. M&A will typically involve the purchase of shares or all or part of a business.
However, there are risks and pitfalls with M&A which should be carefully considered throughout the acquisition process. The thing to remember with these transactions is that the target company needs to be easily integrated into your existing business, otherwise, you may find that the acquisition does not result in the growth you had anticipated and may even have the opposite effect! For example, you could acquire a company and gain new machinery and products; however, if you substantially decrease the quality of what is being manufactured (by using cheaper materials), it is likely that existing customers, and potential future customers, will take their business elsewhere. To overcome this, we see a lot of sellers being retained whether as employees in the management team or on a consultancy basis, to support the initial integration process.
Similar considerations should be had for employees when considering an M&A transaction. If your company's culture is very different to that of the of the target company, it may be difficult to integrate the new employees. You may end up spending a considerable amount of time and money on attempting to integrate the new employees and there is always the chance that they will resign and you will then have to incur further costs in recruitment.
It is important to remember that as part of an M&A you will not only take on the benefits of the target company, but you may be taking their liabilities as well. Therefore, it is vital that thorough due diligence is carried out before the acquisition, so that you can determine whether the potential growth outweighs such liabilities. and risks.
If you are considering the M&A route, specialist advice should be sought on the transaction right from the outset including in relation to:
There is no right or wrong option when growing your manufacturing business and it is very much dependent on what is best for your business and what is available in the market. If you are considering any of the options discussed or would just list a general review of your company, the Corporate team at Forbes have considerable experience in advising businesses in relation to their growth, funding, company structures and
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