Strength in Numbers – Growth by Acquisition

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You can grow a consulting business such as LLP Group in two ways: through organic growth, or through acquisition. The first is a slow, but usually sure, process that can ordinarily be financed from profit, as long as the pace is not too fast. It’s a sure process because expansion need proceed no faster than the market will allow, and because each of the many steps you must take will be a small step that you can take when you’re ready, and not before. But organic growth is not without risk, the risk that others might move faster than you, seize a larger market share and leave you struggling along behind. Growth by acquisition is a far riskier process, and it’s much more difficult to finance, but it’s nearly always a quicker way of gaining market share. So, each process has its merits and its risks.

LLP Group has grown steadily over 24 years, usually through self-financed organic growth, but also through three acquisitions. The first, in Romania, involved the acquisition of a small competitor providing consulting around Microsoft Dynamics NAV. We thereby gained market share and brought into the company some of the best experts in the field. I would judge it a success, though it would be difficult to measure the financial benefit over a long period. When the financial crisis came we lost some customers and employees and we eventually sold our Microsoft Dynamics ERP division.

In Hungary we made a disastrous acquisition that I regret to this day, encouraged by a managing director of great charm and persuasiveness, but little sense of risk. Again, it was a company that was expert in Microsoft Dynamics NAV. We carried out limited due diligence and failed to spot a disastrous project that led to an expensive lawsuit against the company, which we eventually lost, and which finally led to the bankruptcy of the company.

In Slovakia we made a third, small, but successful acquisition to bolster the group’s capability around Microsoft Dynamics AX. This company was sold with LLP Group’s entire Dynamics division, but the acquisition made the division more attractive to potential buyers.

The risks of acquisition are many, particularly for a services company, where value lies mainly in employees and customers, partially in intellectual property, but almost never in saleable fixed assets:

  • Are the financial statements correct?
  • Are revenue projections plausible?
  • Is the sale pipeline plausible?
  • Are contracts with current customers secure?
  • Are relationships with employees good?
  • Are the company’s strategic aims consistent with the buyer’s?
  • Are the company’s culture and ethical standards compatible with the buyer’s?

Due diligence of various kinds and close observation can help you to decide some of these questions, but risk remains.

Sometimes there’s an opportunity that you can’t put aside, so this week we’re announcing the largest acquisition in our history, the acquisition by our Microsoft Dynamics CRM consultancy, LLP CRM, of Logic point, our main competitor in the Czech Republic. Together we will be the largest specialist provider of CRM (Customer Relationship Management) consulting and software in the region, with combined revenues of towards 3 Million EUR and around 45 staff.

‘Marry in haste, repent at leisure,’ the saying goes. This has been a fast-moving relationship, with talks only beginning a month ago. But we’re a good match, each of us bringing different technical skills and different sector knowledge to the table. Together we will be able to offer our customers a wider range of skills, with greater efficiency.

We’re starting close cooperation this week, and have agreed terms for our merger (LLP CRM will acquire 80% of Logic point) subject to due diligence. We expect to tie the legal knot in about three months’ time. Preliminary careful analysis, carried out with caution and scepticism, has thrown up no obstacles, or unexpected risks that cannot be mitigated, but it is the ‘unknown unknowns’ that we must be wary of.

In the meantime, we’re in for an exciting and hectic time, as LLP Group’s numbers in the Czech Republic grow to more than 80 for the first time in the group’s history. Fingers crossed for a long and happy marriage.