6 steps to better strategic acquisitions for innovative, growth orientated companies and start-ups.
Strategic acquisitions remain a potent option for fast tracking revenue growth, diversifying service and product offerings, accessing Intellectual Property and deepening human capital.
If you aspire to make acquisitions but haven’t started yet, or you’ve started and it’s not working, here is a 6-step process to help you succeed and get a return on the investment you will need to make.
1. Acquisition Criteria
Be clear on what you want to buy and why!
If you are interested in acquisitions there’s got to be a good reason.
Aside from ultimately wanting to improve profitability you need to be clear on why acquisition is the best way to;
- Address shortcomings in the business, or
- Effectively capitalise on latent opportunities, or
- Solve other critical business issues
At its core the decision you and your team are making is a choice between building inhouse or buying, via the proposed acquisition, the solution to your organisations challenges.
To successfully establish organisational wide clarity on the choice between ‘building’ versus ‘buying’ requires input from all the business functions e.g. corporate strategy, sales & marketing, HR, finance etc.
While it can be a challenge to harness these diverse perspectives and capture into a cohesive, business wide agreement, it’s the best way to start an acquisition search, and the only way to properly flesh out the criteria you need to develop in order to make the right acquisitions.
Developing the ‘right’ set of criteria is challenging but without any you will be lost.
Rather than shooting for perfect, which always delays getting started, the best approach is to put time and energy into developing a ‘workable’ set that will get you started but will be refined over say 3-6 months based on discussion, feedback and interaction with both potential acquisitions and the internal team.
2. Pro-active Searching
Look in the right places!
If your acquisition strategy is based on diligently working the business sale websites and eagerly awaiting ‘business for sale or merge’ ads in the next industry publication it will fail.
The probability of the perfect acquisition dropping in your lap this way is, at best, remote.
The good news is that the number of owners who will be interested in a discussion about selling with you, even though they aren’t formally advertising their business for sale (the ‘hidden sale market’), will outnumber, by a factor of up to 10 times, those that are formally listed for sale.
This massive disparity continues to be borne out in all the acquisition work we do.
To illustrate we identified 24 companies from some desktop research as potential acquisitions for a current client.
Our first contact generated initial discussions with 7 of the 24 companies (none of which were for sale). By the second contact we got to discussions with 11.
With systematic follow up (involving up to 8 further contacts) we’d expect, based on past engagements, to get to have around 12 -14 general level discussions and from there identify between 1 and 3 high value acquisition opportunities. The single biggest determinant in achieving this high level of penetration is the upfront investment in time and effort to develop meaningful criteria.
3. Harvesting
The ‘hidden sale market’ is very significant but you need to ‘harvest’ your leads!
The right acquisition opportunities usually take a lot longer than you think to finalise.
The acquisition process involves a lot of ebb’s and flow’s. Prospective sellers change their mind because of an unexpected business or personal upheaval. Acquisition targets that told you ‘not interested’ 12 months ago suddenly get interested. To be successful you need patience and discipline.
If your company is dependent on acquisitions for continued success then you need to create a dedicated Acquisitions business function just as you do with sales & marketing, administration, finance etc.
This Acquisitions business function might be internal, or it might be outsourced.
Either way their one of their most significant roles is to harvest the acquisition pipeline. Of course harvesting includes finessing the deal, but it also involves a lot of communication and basic project management. Keeping all the deal stakeholders in the loop and accountable for what they agreed to do will significantly enhance your chances of getting a good deal done. In some cases it means deferring an acquisition for a period while continuing to harvest up to the point when the timing is right or the resources become available.
4. Building Relationships
When it comes to acquisitions of SME’s relationships are all important!
Effective relationships between the buyer and the seller are critical to getting deals done and then, most importantly, making them stick.
In each of the other 5 steps I’ve outlined you have the opportunity to shape your relationship with the acquisition prospect (and for them to evaluate you). The opportunity starts at the time of the first call or contact and extends right through all your later calls, written communications, meetings and personal contacts.
At each interaction both sides have an opportunity and should be actively looking to assess if they ‘still want to do business’ with the other party. Call it the informal, people part of an expansive Due Diligence process
An acquisition that looks good in a spreadsheet or in a Term Sheet or HOA is where it starts. But it’s not where it ends.
In many SME deals there is so much value missed or destroyed by an over focus on the numbers at the expense of the people and the ongoing relationship. At some point in most deals emotions take hold and the deal becomes shaky, and not necessarily because it doesn’t make commercial sense.
That’s when a strong relationship built on the following is essential to getting the deal back on track;
- A detailed understanding why both parties are doing this
- A commitment to transparency in the process
- Open and regular communication, and
- Fostering of the ‘commercial trust’ that has been developing since the first contact by both sides delivering on what they agreed
5. Defining & Refining the Deal
Term Sheets, MOU’s and HOA’s (or similar) are grossly underused in SME transactions!
There are a wide range of reasons for this;
- Trying to minimise legal costs, to
- Thinking it’s better to jump straight to the contract, to
- Feeling like everyone is pretty much ‘on the same page’
Used well one of these documents will smooth the way for a far easier deal process and a much higher chance of success.
By taking time to document (i.e. write down) what you think you have agreed, you will far more easily and quickly identify areas of dis-agreement or misunderstanding.
So as soon as a deal becomes likely or terms get discussed write them down and then share them with the other party. Even if you start by using the ‘back of an envelope’ it’s a discipline any professional acquirer needs to adopt to be more successful.
A well-structured document will focus any inexperienced parties (buyers or sellers) on the many items, other than the price and proposed settlement date, that are essential to getting a deal completed.
Common issues that arise and kill perfectly good deals include a lack of clarity about;
- Due Diligence scope and timing
- Deal financing
- Exclusivity in negotiations
- Transition arrangements for outgoing owner
- Treatment of employees
- Non-compete agreements for outgoing owner
6. Project Management
Effective project management will markedly increase your success rate!
If you get to the point where a deal is doable and its written down then you have at least one more step to get it over the line.
While there is lot of genuine excitement at this point there can also be a false sense that it will all fall into place
It’s also the time when more new players are introduced to the deal.
The new players might include accountants, lawyers, landlords, government departments and other advisors. They all have a role to play and generally want to make a positive contribution for their client. But ultimately many of them aren’t as invested in the deal, or have their remuneration directly linked to success, like the seller and the buyer.
Unless someone owns the acquisition project, is charged with overseeing communications and actively coordinates and project manages all these players the timeline will drift. When the timeline drifts – even if the deal still looks right – the chances of the deal falling over continue to climb.
If you are interested in pursuing acquisitions please call me for a confidential discussion on how we can help.