Establishing a Foundation for Strategic Acquisitions
By Claudio Calado, CM&AA – Managing Director, Doeren Mayhew Capital Advisors
David Praet – Vice President, Doeren Mayhew Capital Advisors
Growth through acquisition is a strategy companies use to accomplish growth objectives at a faster pace in an effort to secure their position in a highly competitive and global market place. Acquisitions, especially in fragmented markets, are a viable option for companies to gain market share, increase product/service breadth and/or depth, grow their workforce, attain new technologies or expertise, expand geographically and diversify their customer base. If you’re contemplating acquisitions as a part of your company’s growth strategy, you and your management team should keep in mind four key considerations for establishing a solid transactional foundation as outlined below.
1. Defining your overall strategy – Management should identify its strategic goals for the next five to 10 years and devise a roadmap on how to accomplish those goals to help improve market position, profitability and growth trajectory. Each of these will enhance shareholder value in the company. Once a strategic vision is in place, the management team can decide whether a strategic acquisition may be a viable way to accomplish the vision or explore other growth alternatives that may be more appropriate.
2. Defining a solid acquisition profile and target list – The key to an acquisition strategy is preparing and following an acquisition profile and criteria for targets that will help achieve the company’s overall strategic vision. During this process your management team should consider the following:
Strategic criteria: Guided by your business’ strategic objectives, you should define what products, services, customers, industry and geographic areas would complement or supplement the current business. Additionally, identify what type of transaction (“bolt-on” or “transforming”) will be most effective in achieving the strategic goals.
– Bolt-on acquisitions typically involve acquiring smaller companies that are very similar to what the company currently does and accelerating its organic growth potential.
– Transforming acquisitions involve acquiring a company closer to the size or even larger than the acquiring company. This type of transaction will have significant impact to the company’s revenue and product/service lines, but may take more time to integrate.
Having defined strategic plans will be important to show potential sellers and lenders the company has a clear plan going forward.
Financial criteria: Management will need to determine a viable target transaction size based on its current financial position and availability of external financing. Access to capital will be vital when looking to complete a transaction. Setting required financial metrics for a target company may provide insight on the approximate size of a transaction and shed light on the financing structure (equity, debt or a combination of both) needed to complete the transaction. Key financial metrics that may help in determining the possible transaction size for a target can be gained by setting ranges or specific amounts a target company should have in terms of revenue and/or EBITDA figures.
Target list: Once you’ve outlined the strategic and financial criteria for a target, perform research to develop and compile a comprehensive target list. While strategic and financial criteria are key to prepare a list of prospective targets, one common mistake typically made during this process is creating a target list that is too narrow. Very seldom does a target company fulfill all of the prospective criteria. Ranking your criteria by priority will be beneficial when preparing an ideal target list and choosing a viable acquisition target.
3. Building a strong internal management team – An experienced management team can mean the difference between a successful and unsuccessful transaction. With the right team in place, the likelihood of a smooth acquisition process and successful subsequent (post-acquisition) integration is much higher. You’ll need a management team that not only possesses industry knowledge and experience, but also has a proven ability in implementing robust financial controls, accounting policies, information technology systems and other operational processes that will need to be integrated after the acquisition.
4. Retaining a strong support team – The merger and acquisition process can often be lengthy and complex. Having a dedicated team of investment bankers, accountants and lawyers to support an acquisition is an efficient way to facilitate successful negotiations and execute transactions. By leveraging their transactional and structural knowledge and experience, the management team can maintain its focus on managing the business while overseeing the process from a high-level view.
Specifically, hiring an investment bank, especially when a company is looking to make its first acquisition, can be essential in completing some of the abovementioned tasks and in closing a successful transaction. An investment banker adds industry, financial, and merger and acquisition expertise that often complements a company’s current management team skills and expertise. You can look to your investment banker to assist you with:
1. Confirming you company’s overall merger and acquisition strategy, and identifying acquisition candidates beyond the company’s current targets.
2. Initiating contact with potential acquisition targets (and keeping the company anonymous until the appropriate time).
3. Participating in meetings and discussions with potential targets.
4. Analyzing historical and projected financial data, as well as industry metrics to assist in the creation of a possible offer.
5. Providing capital markets expertise if the company needs to raise capital to fund an acquisition.
6. Participating in the negotiation and closing process to ensure efficiency and a successful transaction.
Acquisitions can be a great solution to meet your company’s growth objectives, but only if approached correctly. Without a strong case for the strategic purpose of the acquisitions and proper execution, a transaction will likely not be as beneficial (or worst case, could even be detrimental) to the company had it been approached differently. If you’re considering growing via acquisitions let the investment bankers at Doeren Mayhew Capital Advisors help you build the solid foundation you need for your next deal. Contact us.