Acquisitions as a Growth Strategy

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Nperspective CFO

There is a sense of pride and accomplishment that comes with growing a business from the ground up with the entire organization’s team effort. Through organic business growth, a company can use its existing resources to expand its business to create tangible financial results.

The biggest potential negative aspect of solely relying on organic growth however is, it is usually very slow. It could take years for the market to develop enough and for the business to be able to justify a second location, or expand into a new geographic area.

Disciplined controlled-growth doesn’t mean the business will completely avoid unexpected set-backs, but if the organization is focused on continually improving marketing efforts, improving products or services, identifying new or more profitable markets, then business growth should be more predictable and sustainable over the long-term.

One of the fastest ways for a company to grow enterprise value is through a well-defined acquisition growth strategy. Acquisition is a prudent business strategy for companies looking to expand into new markets or territories, to fill a portfolio gap, gain or boost long-run competitive advantage, acquire new technologies and skill sets, and to position the company more favorably when it comes to future exit options.

Many industries are diverse and highly fragmented, so consolidation is a wise growth strategy. Even in consolidated industries, targeted acquisitions can be very rewarding. Under both circumstances, taking the time to develop an acquisition strategy with well-thought-out and realistic criteria, by defining successful acquisition priorities and targets are extremely important.

To successfully deploy this growth strategy, the acquiring company must remain true to the strategy, by continuously referring to, and fulfilling the goals of the transaction throughout the process:

Setting Acquisition Priorities

A strategic acquisition justification should be a specific objective of the acquirer’s strategy and not an ambiguous idea merely labeled as “growth.” Paying attention to key factors of the deal process will lead to greater success in executing the acquisition strategy.

Below are important priorities and guidelines which should be followed to ensure a favorable outcome for businesses seeking to grow through acquisitions.

  1. Create a “Deal Team”:

A Deal Team supports the executive officers of the business in determining the priorities and objectives, organization, planning and executing the transaction process, along with heading off any potential problems. If all aspects of the transaction are properly addressed, the result is usually a smooth, successful transaction. Companies may need to search beyond their in-house team of employees to find specialists with ownership transition knowledge. Key members of a Deal Team may include a:

  • Attorney
  • Accountant
  • Investment Banker
  • Consultant for specific deal issues

The acquisition process can be extremely time consuming, making it easy for the potential upside factors associated with a deal to take priority over daily business operations. Fortunately, a Deal Team provides the focus needed throughout the acquisition process to prevent the daily business operations from being negatively impacted.

  1. Ensure aThorough Due Diligence Process:

Due diligence is the investigation and analysis performed in connection with a proposed acquisition of, or investment in, a business. The scope and magnitude of the due diligence research can vary depending upon the size and complexity of the purchase. In general, the acquirer reviews several years of financial performance of the target business, as well as its management, workforce, relationships, physical and intellectual properties, legal obligations and other important documents.

The risk of not performing an in-depth due diligence process is, a buyer may find that the business purchased is completely different from what was presented, or has undertaken undisclosed obligations, or unforeseen problems.

  1. Identify the Right Acquisition Target Candidates:

Creating a pipeline of potential target companies is an important phase in the acquisition process. As part of a company’s strategic planning process, the company identifies its current business status, and its future strategic objectives. In order to realize these new business goals, a gap analysis is prepared to identify the components required to capitalize on new business opportunities. The acquisition growth strategy will align the strategic vision of the company with the business objectives.

Based on the buyer’s business objectives and desired benefits, a list of companies may be developed which may offer the products or services, markets, technology or geography identified in the gap analysis.

Factors to determine the priority for possible target consideration should include: market share and steady growth rate, product portfolio diversification, profitability, management team, history of innovation, market leadership or niche specialty, special legal, regulatory or environmental issues.

  1. Target Valuation:

A sound valuation process begins with a detailed analysis of a company’s historical financial performance, then forecasting future performance by modeling the target company’s operations by understanding its environment, its business model (including revenue and cost drivers) and making realistic assumptions about future operations and capital structure.

The next step is to apply the results to one or several valuation methods to get an estimate, or range of estimates, of the target’s value. Valuation methods include price multiples, enterprise value multiples, discounted cash flow models, and economic income models. The general consensus is, what drives a company’s fundamental value is its future cash flows. To determine this, diligent financial analysis of the expected return on investment and cash payback is required.

Of equal concern is debt. Undertaking too much debt can be disastrous, however performing detailed financial modeling will help mitigate potential failures.

  1. Identify the Synergies to Be Realized:

A significant advantage of pursuing an acquisition strategy to achieve growth is the opportunity to realize synergies between the acquirer and the target. Synergies may include greater efficiency, lower overheads achieved through the sharing of internal resources and general economies of scale.

  1. Importance of Post-Acquisition Integration:

There should always be a plan in place with milestones dedicated to mapping out the post-acquisition integration. It’s a highly complex process, usually requiring swift action in unison with the running of core business activities. The first 100 days post-deal are critical to ensuring successful integration and that the anticipated synergies between the acquirer and target are captured. Realistic planning is critical to the success and an essential function post-acquisition to realizing the value of an acquisition deal, and without this, the expected synergies could unfortunately be lost.

There are many potential acquisition target opportunities that are not going away. A thorough, disciplined and patient acquisition strategy is the key to success. Growth-oriented companies shouldn’t become trapped by displaying a short-term focus, by “cutting corners” to close the deal.

Success in growth-oriented acquisitions is dependent on undertaking a disciplined approach based on an understanding of the initiatives and actions required to drive short-and long-term value. By addressing the six priorities identified above early in the deal process and throughout the integration, companies can emerge as high performers that capture the expected value of their growth opportunities.

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