You want to grow your company. Often the best way to grow is by acquiring another business in your industry. This is often referred to as inorganic growth or an acquisition strategy. An acquisition based growth strategy is an effective way to significantly grow your business. It also is a generally low risk strategy because you are investing in an industry that you have intimate knowledge. It also presents opportunities to build economies of scale leverage cost synergies. Here are five strategies for successful acquisitions.
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Start with the end in mind.
The first step in developing an inorganic growth strategy is to define your objective. Is it an offensive strategy or a defensive strategy? Is it a “me too” strategy? Is it an exit strategy or a moat-creating strategy? Perhaps diversification or margin enhancing? These are not rhetorical questions. The answers to these questions matter as they will dictate how you grow, where you grow, how you finance the transactions, etc.
A lot of growth strategies are actually exit strategies in disguise. The quickest way to increase the enterprise value of your business is to roll up a few competitors at “x” multiple, integrate the business, pay down some debt, and sell your larger more profitable business to a consolidator for higher multiple.
Build a team, both internally and externally.
Pursing an acquisition based strategy requires an experienced management team. In many automotive businesses, from auto retail to collision repair, key referral accounts, OEMs, and sometimes even vendors hold significant sway over the viability of an acquisition. These groups often prefer to see experienced leadership at the helm. Bring in management that has experience in acquisitions and integrations. As an owner, don’t expect to do it all on your own. If you are an owner that goes on vacation but doesn’t really go on vacation it may be time to re-evaluate the capacity of your team to manage the additional demands of an acquisition based growth strategy.
Your external team is as important as your internal team. Acquisitions are complex and distracting. Integrations even more so. Numerous academic studies have shown that inexperienced acquirers are far more likely to botch a deal. Successful acquisition strategies leverage outsourced advisors to get the deals done quickly and efficiently. M&A advisors and investment bankers, transaction attorneys, tax experts and CPAs are all indispensable in the process. Even the most successful acquiring firms rely heavily on these advisors (albeit for many larger companies many of these roles are not outsourced but are part of the corporate staff). While it may seem expensive, the cost of a misstep in a multi-million dollar transaction is measured in multiples of the fees these advisors charge.
Develop a Proactive Strategy
Rather than waiting for a seller to come to you, go out to them. A number of studies suggest that as much of 80%of industry participants in the industry would be sellers “under the right circumstances”. New buyers often translate that to mean “at the right price”. But price is often not the only consideration, or even the primary consideration for a seller. Developing a proactive strategy defines the “ideal” acquisition target company and takes into account target markets, brands, business fit, size, etc., A proactive strategy allows an acquirer to fit the acquisition to their strategy, rather than fitting their strategy to the acquisition. It also provides flexibility to the buyer and also mitigates your risk and avoids acquisition drift. It keeps your team focused on delivering results that enhance shareholder value. It also develops a pipeline of targets, allowing a buyer to essentially “reverse auction” a seller, keeping pricing expectations in check (subscribers feel free to email to discuss the nuances of a “reverse auction”).
Develop Non-Auction Deal Flow
When you are selling a company you want to do everything possible to develop an auction scenario where buyers compete to buy your firm. But as a buyer you want to do everything possible to minimize this scenario. Warren Buffett is a master at this. You rarely hear about Buffett acquiring a firm in competition with another firm. Instead his deals tend to be handshake announcements. As was the case in the recent acquisition of the Van Tuyl dealer group; Buffett spent years cultivating the relationships before the sale was consummated.
Non-auction deal flow is important in both price and terms. In a non-auction situation, as a buyer and careful listener, you can often provide creative deal structure and terms that meet the sellers needs in exchange for valuable pricing consideration. Perhaps the seller wants to ensure his son remains employed as GM for a number of years, or wishes to retain the real estate for the family. A savvy buyer can leverage these unique requests in a way that creates a mutually beneficial purchase agreement.
Evaluate your alternatives.
Using the tools of corporate finance includes evaluating multiple sources and uses of capital and choosing the lowest cost sources for the highest return uses. Are you certain that the investment in a specific project is the best use of your limited capital? Does acquiring both the real estate as well as the business generate the highest return on your invested capital? Have you considered the impact of inventory, AR and AP policies on your cash position? Have you considered sources of financing, uses of capital, and expected returns?
These are five strategies for successful acquisitions. If you are interested in discussing these strategies in more depth please reach out to me via my contact page. I currently have a limited number of openings for new “buy-side” clients, or clients looking to build and execute an inorganic growth strategy. As a subscriber you can simply respond to your update email to reach me directly. Every week I send out an email designed to help you increase the value of your business using the tools of corporate finance. You can subscribe for updates at https://mewescfo.wpengine.com/subscribe.