Acquiring companies that fit your strategy

As seen in the January 25, 2016 issue of Crain's Cleveland Business

Acquiring a company is one of the biggest decisions a business owner makes. These are large dollar, high-risk decisions that may positively or negatively impact a business for years. So, why do business acquisitions often involve happenstance, and what obstacles prevent business owners from undertaking a proactive, well thought-out acquisition strategy?

Too often, business acquisitions happen because of chance introductions to people who are ready to sell their company. This is a reactive (as compared to proactive) approach. This strategy can work, but before moving forward the following questions must be asked: 1) Does the acquisition fit my strategy?  2) Do I know the universe of companies that do fit my strategy, and have I contacted them?

These questions often are not asked prior to an acquisition because of the time and resource constraints inherent in all businesses. If you are intrigued by the idea of making acquisitions based on proactive strategy and process, then read on.

Below are four important steps to determining your acquisition strategy and process:

Step One: Define your business strategy. Taking a proactive approach to the acquisition process starts with your strategy. To determine your strategy, a few questions that need to be answered include:

  • What are our existing core strengths, and how do we build on them?
  • Are there key customers that are better to add through acquisition rather than organically?
  • What do our clients want that we are not providing?
  • Do we need to expand vertically or horizontally to grow, or just our geographical footprint?
  • What is the best way for us to leverage our current platform to reduce costs?
  • Are there new technologies or capabilities that we could add to drive growth?

Step Two: Identify potential targets through research. There are far more companies out there than you might realize, and you should not just depend on those companies that are brought to you for sale. This is a key step in letting your strategy drive the acquisitions, and not the acquisitions that happen to be available drive the strategy. You also need to investigate the market and understand what companies fit your strategy. Then determine if they can be acquired. Make sure they have the customers, product, technology or geographic fit that your company needs strategically.  

Step Three: Reach out to the targets. Once your list of potential companies is developed, you need to contact them and engage in a dialogue. Our experience has been that many of these companies may not have even thought about selling their business. It will take time to build a discussion and for the target company to determine that it might be time to consider a transaction. You need to connect with them, talk to them about your business and how they could benefit by affiliating with your company.  

Making contact with the right person at the target firm and establishing a dialogue is not easy. It is a time-consuming process and requires many attempts to connect with the right person. Networking, trade connections and advisers are effective ways to initiate communication. Of course, just having a conversation does not get the process very far. It may take several calls and discussions to actually focusing in on the concept of an affiliation. Remember, you have to date before you get married.

Step Four: The deal. Negotiations don’t start with price. Before getting your lawyer to send out a term sheet outlining the deal, you need to establish a relationship with the potential seller and lay out the reasons why the opportunity makes sense for both parties. Be sure to listen and understand their objectives, goals and needs. This provides a fallback position that will help keep the opportunity moving forward when the negotiations become difficult, which almost always happens.   

Leading a business is never easy. You and your team are already time-constrained competing, hiring, developing products and building client relationships. Adding an acquisition mandate to a full workload can be done, but must be well thought through. A full-time corporate development team is an ideal solution, but very few firms consistently need or can retain that expertise.

An in-between alternative is to engage an outsourced corporate development team. Some investment banks focus on executing the acquisition process and have experienced considerable success.

Working with investment banks offer several advantages, including reduced costs; skill and research capabilities at finding targets; success at contacting and engaging the targets; and ability to quarterback the negotiation, due diligence and closing phases. This allows your team to focus on integrating the new purchase.