Acquisition Is Your Growth Strategy, but Where Are Your Targets?

August 16 2023 | 6 Min Read Time

Nicole Kiriakopoulos

E: nicolek@pcecompanies.com

Follow me: LinkedIn

As a business owner, CEO, or CFO, you have probably been to a strategy session or two on the future of the company, where you discussed growth and how to achieve it. You recognize that growth can happen organically — your teams drive growth through sales or developing new products or adding services — but that can take years. You’ve decided that your company should pursue a faster way to grow: via acquisition. By acquiring another business, you can quickly add a new product or service, a new geography, new talent, and, of course, new customers. The benefits are clear, and your strategy is set. Now all you need to do is find businesses for sale, right? As we discuss below, it’s a lot more complicated than that. But make no mistake: Doing this right will be well worth it.

You might start with a quick online search, which will probably turn up a few websites that appear to be legitimate and some listings that sound interesting. But how do you know these are good targets for your specific business, and how do you know what else is out there? These challenges are behind why it can be surprisingly difficult to find the right acquisition target — one that will check all the boxes and move your growth strategy forward.

Businesses Listed for Sale

First of all, some of your best options will likely not even be advertising that they are looking to sell. We’ll get to that in a moment. But even when a business is listed for sale, the process of finding out more about it can be fraught with difficulty and even risk.

For example, recently, a friend sent me a listing she had found for a business she wanted her company to acquire. She asked me to reach out to them and start the process. As an M&A professional who has completed several buy-side transactions, I expected this would be an easy task. However, I was wrong! For one thing, the listing did not include a phone number, just a Gmail address. I thought this might simply be for confidentiality purposes, so I fired off an email expressing interest, and waited. And waited … and waited. After a couple of follow-up emails, I finally received a response. The sender identified herself as a real estate agent representing a family member in selling the company. I sent her our nondisclosure agreement (NDA), and to my surprise, she refused to sign unless we sent personal bank statements first. This was a red flag, of course. The parties should not share any personal or sensitive company information without an NDA in place. At this point, even without knowing anything about the target company or this broker, I advised my friend not to move forward. She was then back at square one in her search for an acquisition target.

Of course, there are quality platforms that list and facilitate sales of privately owned businesses. BizBuySell, BizQuest, and BusinessesForSale.com are a few popular marketplaces. The businesses listed on these sites range in size and industry, but they are typically smaller businesses with low complexity. If you find a business that interests you on one of these sites, you will need to fully vet the company. A buy-side investment banker can help you with this. Larger companies with higher valuations and deal size can be found on platforms such as Axial and MergerPlace. Investment bankers and advisors will sometimes list their sell-side clients on these platforms, which both quality buyers and sellers can access.

Off-Market Opportunities

Sometimes, the best acquisition target — the business that fits your goals and strategies — is not for sale. Finding that business, regardless of your size as a buyer, is a little harder than looking up listings on a website. But it can be done. Once you have identified what your ideal target would look like, consider the following strategies for identifying it among the many non-listed companies out there.

Participate in business associations, industry conferences, and chambers of commerce
Getting involved in your industry associations, conferences, and local chambers of commerce can yield great returns. Through networking and casual conversations with others in your industry, you’ll learn about businesses that align with yours and potentially meet fellow business owners who might want to combine their business with yours. You’ll also meet investment bankers and advisors through these events and associations, which can give you the opportunity to build relationships with them and put yourself on their radar when acquisition opportunities arise.

Conduct direct outreach, research, and cold calling
Spend time researching businesses in your industry. Spending time on a company’s website can often give you a feel for the business. Reach out to them via email, phone, LinkedIn, or a personal letter expressing interest in learning more about their company and networking with them. If they aren’t interested in selling at this time, you could still develop a strategic partnership.

Reach out to your existing contacts and relationships
Contact your trusted accountant or attorney, and discuss your vision with them. They’ll probably be willing to introduce you to bankers and advisors they’ve worked with. They might even know a client who could fit what you are looking for, or at least keep you in mind should they hear of businesses that might be looking to sell.
Consult investment bankers, business brokers, and M&A advisors
Investment bankers, business brokers, and M&A advisors not only have their own listings of companies they are representing for sale (sell-side), but they can also find targets for you on what is called the buy-side. These professionals will spend time learning about your goals for an acquisition, including geography, business, culture, and size, and use their networking and informational resources to find businesses that fit your criteria. They will also handle outreach to those targets and identify which ones are interested in hearing about your offer. The buy-side advisor will help you through the entire process, up to and including the close. That assistance can be immensely valuable, since these advisors typically have vast experience in this process.

Of course, finding companies potentially interested in selling is only part of the battle. You also need to figure out whether they are worth pursuing, and if so, you’ll need to overcome a number of potential hurdles before closing on the deal.

Competition

Companies that are well run, with clean financials and good processes in place, are in demand and therefore quite scarce. That means you’ll face competition. If a quality company is in the market to sell, you will have to contend with a list of potential buyers, which will drive the valuation higher. Furthermore, if the business is doing well and growing steadily, which is typically a requirement of a buyer, the owner of the target company probably isn’t seeking an exit, which also presents a challenge.

Financial Performance

As with any investment, financial performance is not guaranteed. A company can show great profitability for years, and then the unexpected can occur, and the business can be impacted. Finding a company with clean, well-prepared financials can be a challenge; finding one that can weather a downturn is even harder. Any change in leadership, product specifications, availability of raw materials, accounting practices, or other elements can affect financial performance, so it’s important to assess all of these issues and evaluate the company’s resilience.

Culture and Strategic Alignment

Finding a company that looks good on paper is one thing, but will it fit with your non-tangible requirements? Cultural compatibility is the glue that can hold the organization together during the integration process and beyond, as the businesses become one. Finding a company that fits within your culture and strategic goals keeps everyone rowing in the right direction and will maximize anticipated synergistic value and overall success.

Integration Challenges

Once you have found a target and started the “dating” process, when you are learning about the company you want to acquire, try to anticipate what challenges you will face when marrying the two companies. Are the financial systems the same, or will you need to convert one or purchase new software to enable the two systems to share data for seamless financial reporting? How will you integrate the employees from the acquired company? If your benefit plan is different, how will you accommodate or change the new employees’ benefits? You must also consider regulatory issues: Are there any regulatory hurdles you’ll need to address before or shortly after closing the transaction? These and other considerations add complexity to the process. By planning for each issue before the final purchase agreement, you’ll maximize your chances of a successful transaction and a thriving business post-closing.

Finding the Needle in the Haystack

Finding companies to acquire as part of a successful growth strategy takes energy, effort, and time. Experienced professionals such as PCE investment bankers can deliver many benefits for you as you undertake this important endeavor — a smoother process, the confidence that you’re considering all important factors, and a range of resources to ensure you find the right business to fit your strategy. And throughout the process, PCE promises that the utmost confidentiality and discretion will be exercised at all times. Once you determine your growth strategy will be through acquisition, you’ll need to build a solid pipeline of targets, navigate the complexities of a dynamic process, and ultimately find the right target and execute on a well-built integration plan. M&A is an exciting strategy for your business’s future and for your employees. Let us help you ensure success in your growth endeavors.