By Gary Miller, CEO, GEM Strategy Management, Inc.
POSTED: July 15, 2014
Slow growth is affecting many small and middle market companies causing owners to re-evaluate their growth plan strategies. Traditionally, business owners have depended on “organic” growth only, (growth coming from existing and newly acquired customers) as their primary sources of revenue. With higher taxes, more regulations and industries consolidating, business owners realize operating expenses are rising faster than new revenues.
Faced with this environment, smart business owners are developing acquisition programs to bolster revenue growth. Since most business owners have neither expertise nor experience in acquiring companies, they often hire a management consulting firm with M & An experience to assist them in developing a successful acquisition program. All successful programs require a combination of careful planning, savvy thinking, and well-executed tactics.
Six Critical Steps to a Successful Business Acquisition Program
- Planning your acquisition program;
- Finding and approaching the right acquisition candidates;
- Conducting robust due diligence;
- Structuring the proposal;
- Preparing transaction documents and closing; and,
- Integrating the acquired company.
This article examines in depth the first step only of the six step acquisition process, “Planning Your Acquisition Program” (see The Denver Post, 6/22/2014 “Grow Faster with a Well-Planned Acquisition Program” for a description of all six steps.
Careful Acquisition Program Planning Includes
- Determining the program goals:
- Selecting the strategy and rationale; and,
- Determining criteria and, matching criteria against available financial resources.
After careful examination of alternative methods for corporate growth — new product development, licensing arrangements, and joint ventures’ — it must be determined, whether acquiring another company is the most effective path to meet corporate growth objectives. An acquisition program should ameliorate strengths and/or eliminate weaknesses. Before embarking upon a program the company must spend time in serious self-examination to determine its own strengths and weaknesses and their capacity for supporting, financing and integrating a newly acquired company.
Establish Business Acquisition Goals
- Goals can include addressing these issues.
- To fill a product/service line gap
- To expand geographically while taking out a competitor
- To upgrade infrastructure
- To increase distribution channels
- To improve the acquirers balance sheet
- To acquire management talent and their customer base
- However, the most important goal is any acquisition program is to add enterprise value and increase shareholder wealth.
Establish Business Acquisition Strategy and Criteria
Among others, an important strategic issue is the form of payment. The ramifications of using cash or stock must be examined against the possible benefits of using other forms of payment, such as notes, earn-outs, stock options, bonus clauses, and non-compete contracts. Flexibility in structuring the transaction will enhance the buyer’s negotiating position.
Criteria supporting the strategy should include the following:
- Companies of interest
- Financial requirements (balance sheet, cash flow, earnings history, ROI)
- Minimum size
- Market position (i.e. # 1, 2, 3, other) growth rate potential
- Profitability trends
- Regulatory environment
- Labor/capital intensiveness
- Management team depth and quality
- Payback time period
- Debt capacity
- Synergy of combined operations
- Product/Service offerings and quality
- Brand and reputation
- Cultural fit
Careful planning can significantly lower risk of failure. The path to rapid growth is littered with acquisition “road kill”. Most acquisition failures can be traced back to poor planning. However, that same research indicates that those companies that complete more deals than companies who do not, generate higher returns on investment, greater enterprise value, deliver stronger financial performance and create significantly more shareholder wealth.
Gary Miller is founder and CEO of GEM Strategy Management, Inc., an M&A management consulting firm focusing on strategic planning and growth strategies, mergers and acquisitions, value creation and exit strategies for business owners of middle market companies. For more information contact firstname.lastname@example.org or 970.390.4441