Paving the Path to Expansion: Growth Through Merger or Acquisition
Regular Inorganic Growth Applicable to Most Businesses
Organic growth is the route most businesses follow. You attract customers, amplify sales, increase output and bit by bit, you expand. But have you considered the other path, the road less traveled – the path of inorganic growth through mergers and acquisitions (M&A)?
The term “mergers and acquisitions” might seem daunting, often associated with massive corporations. But it’s not reserved solely for the business behemoths. Incorporating M&A into your existing business practices can help propel your business toward its future goals.
How an M&A Strategy Can Benefit Your Company:
- Boost Your Customer Base: Through M&A, you can acquire new customers without doubling your sales force or marketing budget and/or can acquire companies with complementary offerings that could be sold to both existing and new customers.
- Enhance Efficiency and Profitability: Merging with or acquiring another company can reduce costs through economies of scale, and/or can reduce the cost of your overhead. Other factors to consider concerning efficiency and profitability include technology, training, and investments in both capital expenditures and process improvement.
- Key Talent Acquisition: Different companies cultivate different skill sets. A merger or an acquisition can infuse your business with fresh perspectives and diverse abilities. It can also be a mechanism for adding key members of your leadership team through a merger.
- Accelerate Growth with Technology: As your business evolves, competitors might emerge, potentially affecting your sales. Acquiring a company with a different customer approach or novel technology could boost your business value and strengthen your succession plan.
- Larger Businesses Yield Larger Multiples: Companies with well-structured and properly incentivized management teams typically achieve higher Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) multiples. An effective M&A strategy can elevate your business to a new level, leading to higher valuations.
Developing a Sound M&A Strategy:
If you’re keen on growing your business through M&A, focus on these steps:
- Define Your Acquisition Strategy: Both companies should hold several meetings to discuss competition, suppliers and customers. Every aspect could significantly impact your business and its valuation. Aim for at least 10 targets to optimize your capital model and minimize M&A risk.
- Set Acquisition Criteria: Emphasize cash flow and quality of earnings. Hire CPAs and other professionals to scrutinize management’s projections and underlying assumptions. Companies often miss out on effective M&A strategies by only focusing on nearby regions, while better prospects may be elsewhere.
- Conduct a Thorough Candidate Search: Internal processes may not be enough to identify potential targets. Hire M&A professionals with investment banking backgrounds who have access to multiple databases and can evaluate both public and private data to maximize your company’s potential.
- Send a Letter of Intent: This letter should contain a deposit along with a clear timeline for transaction completion. It’s common to include a break-up fee in case of non-performance or significant regulatory hurdles.
- Perform Due Diligence: This step takes time and resources and can distract your management team from their daily responsibilities. Consider outsourcing this function to free up your team.
- Closing the Deal: This step can be tricky as terms often change, leading to fluctuating prices. Anticipate last-minute changes and potential remorse from either party based on new insights.
Remember, embarking on an M&A strategy is not a one-time venture. It should be a continuous process, a part of your business lifestyle. Be open to change, be adaptable and always keep an eye on the evolving landscape.
Are you prepared to take your business to the next level through an M&A strategy? Contact an Adams Brown advisor if you need support, including developing strategies, valuation services and managing due diligence.