What to keep in mind when acquiring a company in France

We, at Moonbase Capital, are always excited when searchers find what they’re searching for! A few weeks ago, our dear friends from France Pierre Donvez and Rafa?l Dufour acquired ASP & ALSAMECA, a French family business in the industrial sector. (Side-note: Catch our interviews with them here and here.)?

The news prompted us to look a bit deeper into France’s search fund scene. Slightly more than 25 search funds have been set up in the country over the past six years, with about 15 acquisitions concluded so far, Founder and Partner at SPARK AVOCATS Ariane Olive explains.

Ariane has been an avid supporter and MBI-focused lawyer for over 20 years, becoming a key pillar of France’s search fund scene. She told us a bit about France’s age-pyramid trajectory, hot industries for searchers in France today, as well as what to watch out for when acquiring a company.?

The age-pyramid scheme seems to be taking longer than expected

France is known as an old population. In 2023, every fourth person in France is over 60 (equivalent to 26%). Expectedly by 2040, the number will be one in three. As a searcher, this sounds like a massive opportunity. Company owners will be looking to retire soon - or so it seems.?

For over 15 years, the market has been clearly in favor of sellers, with an abundance of acquisitions in contrast to only very few companies to sell. The general consensus was that a turning point is on the horizon, with 25% of SME managers in France being over 62, and thus, a high probability that these owners will want to retire soon and sell their company, Ariane explains.?

However, Ariane has been hearing this for over 20 years, with no actual turning point emerging. “So far, there hasn't been a massive turnover of the market in the buyer’s favor, but there is a slight trend of an increasing number of sellers and decreasing number of purchasers.”?

The industries that are hot in France…

Searchers in France are gravitating a lot more to companies with repeat business and easy geographic expansion, such as tech or para-industrial distribution companies, Ariane says. Purely industrial companies are very expensive and not easy to obtain financing for from banks. Additionally, although tech companies had been boasting valuations that were way too high for search funds to consider in the past, the VC squeeze of 2022 has pushed down these valuations, making tech companies viable candidates for searchers today.?

Pre-acquisition, searchers need to get their facts and backing team straight

To get the most out of the acquisition, Ariane believes there are a few things to bear in mind. Pre-acquisition, individuals seeking an MBI-type acquisition need to define their model very clearly. They need to have a rough idea about what sectors they could be interested in and accordingly, seek investors that could be helpful in these specific sectors, either through experience, knowledge or network, Ariane says.?

But it’s not all about hard facts - soft skills are extremely essential

“You need to be very aware of your posture when dealing with a seller,” Ariane adds. “In these situations, it’s important to maintain a very adaptable posture without asserting yourself in an overbearing kind of way. Show humility and be low-key.” Ariane believes that this is one of the main factors that renders the searcher’s proposal relevant and competitive.?

Additionally, searchers need to hone an ability to ask the sellers questions about how things have been done, without being judgmental. Being respectful to how the potential acquisition target has grown is essential. However, this should not let the searcher shy away from showing the seller an ambitious strategic plan for moving forward, and have them agree to it.?

Building this kind of trust makes the due diligence stage easier?

The LOI and due diligence processes can be all the more fruitful if the seller and buyer have built a relationship based on trust, mutual respect and transparency. “Through this relationship, the seller will be inclined to transparently disclose as much as possible of their company, which then enables the due diligence team to cross check legal, accounting, tax, commercial, industrial or environmental issues,” Ariane explains. This allows for a realistic, efficient due diligence process that properly reflects the company’s operations in the field.?

“Many people say that the bad news about company performance only emerges after a deal goes through”...

The reliance on third partners in risk assessments can prove beneficial

Once the target has been identified and negotiations have led to the signing of the LOI, the investors and searcher have to internally challenge the target company to ultimately decide whether the transaction could be pursued or not, and could also rely on third parties. “To me, it's very important to always be using your investors and lawyers to make sure that some critical looks are being projected on the transaction,” Ariane says. “It's one of the lawyers’ main roles, in my view, to sometimes highlight that the risks need to be reassessed for certain companies.”?

Once the deal has closed, get ready to factor in the human aspect

“Many people say that the bad news about company performance only emerges after a deal goes through,” Ariane says. However, that is not necessarily true, she adds. Searchers tend to have a very thorough, well-conducted due diligence process, which is why operational and financial surprises should be less likely to occur after the acquisition. But what is much more difficult for searchers is to apprehend the human factor, i.e. the cultural aspects of the company.?

This spans being a manager…

As a searcher, you are the successor of a seller with a certain managerial posture, behavior and personality. It is now up to the searcher to analyze which of these traits made the company successful, and which of them were considered a weakness to the firm’s success, and accordingly build up their own persona that is best for the firm.?

And reigning in the existing team…?

Searchers who buy a company will now be joining a team, and need to accordingly adapt to be a cultural fit. At the first stage, the new owner needs to observe and adapt. It is only at the second stage that they can start developing the company’s culture into the best direction. “There will be very different personalities and very different ways of making business units work,” Ariane says. “But there is this sort of implicit harmony amongst the existing team about what the company’s pace is and what it shouldn't be.” What acquirers often forget is that they are entering a company that has already been successful in its growth and operations, so making abrupt changes may be harmful to the company’s trajectory. “New owners need to find out what works and then fix what doesn’t,” she concludes.?