It's possible to grow your business and create value through an acquisition. In this article Waypoint Private Capital provides a review of the factors and explains why it may be a great time for you to acquire another company.
Business Growth & Value Creation Through Acquisition
Have you ever thought about acquiring another company to grow and strengthen your business? If so, there are a number of factors making 2013 a great time to pursue that thought. First, there are a large number of business owners who are ready to sell. Over the past four years these owners have wanted to sell their company but delayed the sale because they thought the economy would have a strong recovery and their company would be worth more if they waited. Unfortunately, the recovery has been very mild to date, and none of the economic pundits are predicting a near term catalyst that will cause the recovery to accelerate. With no end in sight, many business owners have now resigned themselves to this new normal and are willing to entertain a fair offer to buy their company. The second reason, which helps the process significantly, is that money is available to help fund acquisitions. Lenders are back in the market actively trying to make new loans, with a specific mandate to grow their business, commercial, and industrial loan portfolios. Private equity firms also have a significant amount of capital to invest in good companies.
A business owner should take the following 6 steps to start the acquisition process:
Step 1: Hire an Investment Banker
The first step, which is admittedly self-serving but also true, is to hire an investment banker to help with the process. A good investment banker has been on both sides of many transactions and can guide a buyer through the acquisition process, so they have a higher likelihood of success. The investment banker will generate the list of possible acquisition targets, contact and track the progress with each target, conduct initial screening interviews to qualify the targets, perform the financial modeling and valuation analysis, lead the negotiations with the seller, and help line up any outside financing necessary for the acquisition. We will leave the activities handled by the investment banker out of the discussion below and instead focus on the parts of the acquisition process for which the company will be responsible.
Step 2: Determine Strategic Rationale for an Acquisition
You should take the time to carefully think through the reasons you want to make an acquisition. Consider your company’s strengths and how they can be used to increase the value of an acquired company. Also consider your company’s weaknesses and how an acquisition might help to fix them. Think through your people, products, operations, and facilities to identify opportunities. The resulting strategic rationale will probably take on many different names and approaches, but they should all fit into the larger categories of cost synergies and sales and distribution synergies.
Cost synergies are what most people think about first when reviewing business combinations. If company X acquires company Y, which is in the same industry, they may be able to eliminate many of the redundant management and support positions in the combined entity and significantly drive down the payroll to revenue ratio. They may also be able to rationalize their infrastructure costs through cutting redundant offices, warehouses, and manufacturing facilities or equipment. Finally, the combined entity may have the ability to negotiate better discounts on materials, supplies, and services based on the increased volume of purchases.
Sales and distribution synergies are another one of the primary reasons to make an acquisition. The acquiring company can create significant value by acquiring a company with limited sales and distribution and pushing the new products through the acquiring company’s larger sales and distribution system. Likewise, if the acquisition expands the distribution of the acquiring company, they can push their existing products through the expanded sales and distribution network. An example that helps demonstrate this type of synergy is the Anheuser-Busch acquisition of Goose Island Beer Company in 2011. Anheuser-Busch has an established distribution network throughout the United States and some excellent beer brands (stop laughing – some people think so), but they have been losing market share to craft beer brands since the 1980’s. They tried introducing their own craft beers, but were not able to capture the mystique of a true microbrew. Their acquisition of Goose Island allowed them to take a brand that was already successful, but with limited geographic distribution, and roll it out through their vast distribution network in all 50 states and parts of Europe. Anheuser-Busch captures synergies and increases profits by utilizing the same sales force and distribution infrastructure to sell and deliver more products with minimal cost increases. Large drug companies employ the same strategy. They acquire smaller drug companies and push those drugs through their global sales force to dramatically increase the sales of the acquired company.
These sales synergies are even more beneficial when the distribution and product offerings are expanded for both the buyer and target company. See an example of this in the “M&A Strategy Dissection” portion of this newsletter.
Step 3: Determine Acquisition Profile and Metrics
After determining the acquisition strategy, you should define the criteria and metrics associated with the acquisition.
What specific characteristics must be present at the company for it to fit the strategy and be an attractive acquisition?
What is the maximum and minimum size acquisition you will consider?
What valuation metrics will you apply?
You will not be able to define every metric before the acquisition process begins but starting with a good set of criteria and metrics will allow the acquisition process to stay focused and will help set boundaries to keep you on track once negotiations start and emotions start interfering with rational thought.
Step 4: Assign the Team
You need to assign a team to the task of evaluating acquisition targets and integrating those that are successfully acquired. The composition of this team will depend on the size of your organization and how you have divided responsibilities. The team can be made up of just the CEO and his outside advisors, but ideally will include senior people from finance and accounting, operations, sales and marketing, and human resources. Each person should have a well-defined list of items they are responsible for evaluating and reporting on to the rest of the team. If the acquisition strategy is important to the company then make sure it is a high priority for the team. Recognize that they are already stretched thin, and put incentives in place for successful acquisitions and integrations. Supplement this team with outside advisors including experienced investment bankers, attorneys, and tax accountants.
Step 5: Conduct Due Diligence
Due diligence is the process of conducting an in-depth analysis of the company and then confirming everything the target company’s management team has told you about its markets, customers, distribution, operations, technology, competitors and anything else you think is important.
Financial due diligence is necessary to verify the accuracy of historical financial statements, reasonableness of financial projections, and tax consequences of the acquisition. Legal due diligence verifies all significant contracts, intellectual property, and status of outstanding lawsuits. Due diligence will start after the investment banker has found and qualified some targets that your team is interested in pursuing. The primary due diligence should take place before you issue a term sheet or letter of intent and should focus on those items you believe are the most important for realizing the strategic fit. When you and your team are satisfied that all major items have been reviewed, then a LOI can be issued. Minor due diligence issues can be addressed after issuance of the LOI. The due diligence process might seem daunting at first, but with the help of your internal team and outside advisors you can conduct the appropriate amount of due diligence to make the proper decisions.
Step 6: Manage Integration
The biggest and most costly mistakes made with acquisitions usually happen after the acquisition has been completed and you move into the integration phase. To avoid this, the team responsible for evaluating the acquisition needs to stay involved with the integration after the deal closes and make sure that the opportunities they identified are realized and that their strategy is properly implemented. If the implementation is simply handed over to an operations team after the close of the acquisition it is likely that they will unwittingly destroy much of the value, you anticipated getting from the acquisition.
A well thought out and properly executed acquisition strategy will help to grow your business and create value. Give us a call and we will help you get started.
About Waypoint Private Capital
Waypoint Private Capital is an investment banking firm that educates and advises middle-market, privately held companies through critical stages of their business' life cycle. Waypoint helps business owners and entrepreneurs sell companies, buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from the business.
To learn more visit waypointprivatecapital.com or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.
Steve Sprindis is co-founder and managing director of Waypoint Private Capital. © 2013 Waypoint Private Capital, Inc. All Rights Reserved.