For business owners and financial executives, growth is more than just a goal, a strategy, or a forecast—it’s a necessity for the survival and success of your business. Organic growth initiatives can provide innovation, control, and scalability, which are crucial to staying competitive in today’s business landscape. But if you’re seeking a fast track to meaningful growth in your business, including acquisitions in your growth plan is a must.
Read on to learn why and how your company can benefit from a well-executed acquisition strategy.
Why Should Acquisitions Be Part of Your Company’s Growth Plan?
Acquiring the right business can be a powerful way to grow your organization—for example, by delivering additional market share or offering new synergies. The following are just a handful of reasons why you should develop an acquisition strategy and explore the attributes of an ideal target that will spur growth and increase the overall value of your business.
Speed to entry. Acquiring a company that is already established in a particular geographic market allows you to quickly enter that market without the time commitment of building from scratch. Gaining access almost instantly to new customers, additional distribution channels, and increased market share is especially key if you are looking to expand operations, whether in the United States or in another country.
Increased market share, revenue, and profitability. Increasing your market footprint through acquisition is a quick way to bring in new customers that in turn will fuel revenue and subsequent profitability. And by acquiring a competitor, you can expect to not only access their customers but also eliminate a challenger for market share.
Access to new assets and talent. When you acquire an established business, you also acquire its assets, intellectual property, workforce, and branding, not to mention any proprietary products, services, or know-how that can be incorporated into your company. Fresh assets that align with your strategy—plus employees who can liven up the existing business—present an opportunity to enhance and grow your capabilities.
High-value synergies. Acquiring a complementary business can generate coveted synergies that deliver cost savings, volume discounts, and operational efficiencies, which add up to higher profits and greater long-term value. By identifying potential points of collaboration before the acquisition, you can design a post-acquisition plan to capitalize on those opportunities and track your progress—and the sooner you can realize those synergies, the more value you will create.
Efficient use of capital. Whether you are a private organization or a large, publicly traded company, you want your excess cash working for you. Making acquisitions is a great use of excess cash, increasing profitability while driving overall value of the business.
How Can Your Company Execute Acquisitions to Achieve Growth?
In order to reap these rewards, however, you must understand how to make acquisitions according to your growth plan. Executing a successful acquisition that fully delivers the potential benefits requires that you take the following steps.
Define your acquisition strategy. What would your ideal acquisition target look like? What is most important to the growth of your business? Will your focus be on a new product or service or a new geography? Are you looking to acquire a competitor to boost your market share and reduce competition? You may want to achieve all of the above, but ultimately you will need to determine the company’s top priorities. Narrowing down your “wish list” will prepare you to find and negotiate with potential targets in order to home in on deals that align with your overall corporate strategy.
Determine how you will fund your strategy. Even a great acquisition strategy can fall short if you lack the appropriate capital to execute it. Seasoned advisors working with full-service investment banks can guide you through the various ways to raise capital—and help you determine the best option to execute your specific growth strategy. The most common sources of acquisition funding are:
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- Excess cash/cash reserves: If your company generates excess cash, consider putting it to work by funding acquisitions. An all-cash offer may even provide you with an edge over other deals that come with financing contingencies.
- Senior debt financing: Traditional lenders such as banks and other financial institutions are often eager to support growing companies with a strong cash flow. Although you will be paying interest, raising debt allows your organization to preserve cash and liquidity.
- Mezzanine financing: This combination of debt and equity financing provides access to capital while minimizing dilution. Mezzanine financing involves higher interest rates, but repayment is more flexible; in most cases, interest is only due initially.
- Equity financing: Although this option avoids debt, you give up ownership stakes through the sale of shares or a portion of your ownership rights to investors, whether through private equity, institutional investing, or an initial public offering. Not only is this a more expensive solution, but you will be adding a partner who will want a say in running the business.
Identify acquisition targets. Identifying the right acquisitions is a key part of the strategic growth process. Save time chasing companies that don’t share your goals and look instead for those that align with the strategy you have defined for your organization. Hiring an advisor, such as an investment banker, can help with your target search and subsequent execution of the deal. For more information on finding acquisition targets, see Acquisition Is Your Growth Strategy, but Where Are Your Targets?.
Conduct due diligence. To ensure that any potential target’s financial performance is in line with expectations, you will want to complete financial due diligence or get a quality of earnings (QofE) report done by a third party. A buy-side QofE report is usually conducted by an accounting firm that tests all the components and details around a business’s net income and EBITDA to confirm that the business is generating earnings consistent with the actual numbers—in other words, that the business is worth the price you will pay. Involving someone from your operations, legal, technical, HR, and insurance teams can help you uncover any potential liabilities or pitfalls surrounding integration and ensure a seamless flow of information throughout the process. Your due diligence team can also uncover potential post-closing synergies and develop an integration plan to handle any problems (and to track and realize any synergies) discovered during due diligence.
Negotiate the terms of the deal. As a buyer, you want to ensure that you will realize your return on investment, but you’ll need to carefully balance hard negotiations with sensitivity to a founder-owned business. Consider a collaborative approach to working with all parties beyond the closing. Understand what is non-negotiable in order for the acquisition to be accretive, as well as where you can be flexible in order to build a positive relationship with the seller. Selecting advisors who recognize and align with your goals will save you money and headaches during the process. A highly experienced mergers and acquisitions attorney who understands your needs and provides a commonsense approach is worth every penny! Also lean on your tax advisor for any tax implications of the deal structure, and work with an experienced investment banker to manage it all.
Execute and integrate. Throughout the due diligence process and purchase agreement workflow, it is imperative to plan what the first 90 days will look like with your newly acquired business. Once the deal is inked, both sides will want to know: Now what? Are you integrating the two systems, or will the new acquisition be a stand-alone business with its own back office? Who is in charge? Is the company changing its name? Having a detailed plan for Day One and beyond—one that answers these questions and more, including which integration tasks are assigned to whom (and what the deadlines are)—will be crucial for a successful transaction. Important checklist items in those first weeks include various points around payroll, bank accounts, insurance, hiring, etc. Having a trusted team in place, ready with a solid plan and a positive attitude, is the best way to welcome the new company into your organization.
Acquisitions can be a very powerful and impactful tool to grow your business, but you’ll need to complete meticulous due diligence and perform smart negotiations while developing an optimal integration plan that puts your newly combined businesses on an upward path to success. If you are interested in exploring acquisitions for your business, PCE can deliver buy-side service offerings that help you achieve the growth you desire. Contact us today!
