The foundation of my business is to increase the value your business. It is the reason I write a weekly note about using strategy and finance to increase the value of your business. The reason I speak at so many industry events. The reason I spend time helping you understand finance as a driver to increase the value of your business.
An important part of increasing the value of your business is growth. Whether that growth comes organically, through increased revenues or increased efficiencies, or inorganically through acquisitions or new location developments, a history of growth is an important part increasing the value of your business.
But growth for the sake of growing can destroy companies. Business owners across many industries found this out the hard way when the company imploded under the weight of rapid growth. In fact, according to many studies, inorganic growth, or growth through acquisitions, has been a losing bet for buyers (but a winning bet for sellers).
It is estimated that more than $200 billion of wealth that was destroyed through bad acquisitions in the past 20 years. Yet when done right, acquisitions are a very effective way to create substantial shareholder value. These are four proven ways to develop a successful M&A campaign.
Create an Acquisition Strategy
Not all businesses that make acquisitions have a strategy, and not all businesses that have strategies stick with them. But historically, firms with written acquisition strategies outperform those that engage in ad-hoc and infrequent acquisitions. Specific target criteria minimize the chances of pursuing value destroying acquisitions. Before setting out on an acquisition binge, spend some time critically assessing what your ideal target looks like – financially, operationally, and geographically.
Target Smaller Companies
A very successful acquisition strategy employed by private equity firms, as well as industry consolidators, is to target smaller companies in “roll up” strategies. Targeting smaller companies allows a consolidator to diversify risk among multiple targets, and lessen the relative impact of a miscalculated acquisition. Existing research shows that large deals tend to destroy more value than small deals, and companies that acquire small firms consistently outperform companies that acquire large firms.
Focus on Operational / Cost Synergies
There are 3 main types of synergies in an acquisition – revenue, cost, and financial. In other words, acquisitions make sense when a buyer can increase sales, decrease costs, or lower the cost of capital. Before the deal closes, the sky can appear to be the limit. To keep expectations (and pricing) realistic, focus on cost synergies. Cost synergies are traditionally the easiest to model and have the greatest likelihood of being delivered as management can realize them directly through their own post-merger integration efforts. Conversely, revenue and financial synergies are more difficult to realize, as they are outside of managements direct control.
Know the Price, Pay for Value, and be Prepared to Walk Away
Warren Buffett once said “I’d rather buy a great company at a good price than a good company at a great price”. The best acquisitions are not necessarily the cheapest acquisitions. A great management team may be worth a premium. Excess capacity may be an opportunity to increase sales. Outdated equipment may be an opportunity to increase efficiencies. Identifying, and delivering on, all the potential upside of a deal often can turn an “expensive” acquisition at close an affordable acquisition post close. But ultimately, the deal has to work for all parties involved.
Are you are planning on growing in 2017? Shoot me an email and let me know you plans (hit REPLY and try me, I’ll respond). I want to help you increase the value of your business. If you think an acquisitions based growth strategy is appropriate for you, let’s talk about ways we can work together. And if acquisitions aren’t right for you – that is OK – I still want to talk with you. I enjoy speaking with people in an industry I’m passionate about.
Until next week!