By Gary Miller, CEO, GEM Strategy Management, Inc.
Many companies are facing slow growth due to a tepid economic recovery, more federal and state regulations, the Affordable Care Act (ACA), and a lack of confidence in the economy. Faced with these conditions, small and middle market companies are developing acquisition programs as a part of their strategic business plans to accelerate corporate growth.
With banks wanting to lend, low interest rates, plenty of “dry powder” (money to invest), a tsunami of companies for sale — making it a buyer’s market, companies are charting a path to the next era of opportunity and wealth. However, growing significantly in a flat-growth or a tepid environment requires a bold combination of careful planning, savvy thinking and well executed tactics.
This article provides an in-depth look at step one only, of a six step acquisition process, entitled “Plan an Acquisition Program” (see The Denver Post, “Grow Faster with a Well-Planned Acquisition Program” for all six steps published 6/22/2014).
Careful planning includes, determining the acquisition program goals, selecting the acquisition strategy and rationale, determining acquisition criteria and matching them against available financial resources. After careful examination of alternative methods of 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. Often, companies developing an acquisition program hire a consulting firm with M & A experience to assist them in this self-examination effort.
Establish 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
Establish Acquisition Strategy and CriteriaAmong 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
- Minimum size
- Profitability trends
- Labor/capital intensiveness
- Management team depth and quality
- Debt capacity
- Product/Service offerings and quality
- Cultural fit
- Brand and reputation
- Synergy of combined operations
- Payback time period
- Regulatory environment
- Market position (i.e. # 1, 2, 3, other)
- growth rate potential
- Financial requirements (balance sheet, cash flow, earnings history, ROI)
Summary 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.
However, the most important goal is any acquisition program is to add enterprise value and increase shareholder wealth.