Growth by acquisition is an ambition harboured by many businesses, large and small alike, but how to start? What’s the best way to identify potential acquisition targets in a way that improves the chances of ultimately converting a value-enhancing, strategically relevant business?
Acquisitions offer the opportunity to take major leaps in terms of size, market, geography, technology and profitability in a relatively short space of time and ultimately at a much lower level of risk than internal investment over a long period.
However, despite the attractions of acquisitions, everybody knows the stories of companies who have got it badly wrong. Victanis exists to help customers maximise their chances of getting it right. In this series we will lay out some of the key elements, from our experience, that are vital to the successful implementation of acquisition strategy.
Begin at the Beginning
It has been known for Victanis to be presented with the following proposition: “We have a lot of cash. We ought to do something with it. What can we buy?” Now, it is true that this sentiment is not always put to us in such bald terms. Nevertheless, it is somewhat surprising how often this attitude predominates initial exchanges with prospective clients.
In our experience, however, the chances of completing a successful acquisition are determined to large extent before even a first target has been identified. It is of first importance for a business to know its own mind first before embarking on the acquisition trail. A clear sense of strategic rationale is required, and this takes a number of different strands of activity.
Proactive, not Reactive
The apocryphal example above of the company with more cash than sense often seeks outside help once the business has realised the futility of waiting for the targets to come to them. Sell-side advisors, online exchanges and existing relationships have their place, of course, but to radically improve the chances of buying a good company at a reasonable multiple it is important not to rely on being invited to discuss with companies or wait to be invited into processes.
Instead companies need to be proactive from the start and we will detail a number of ways and approaches below. However, in essence what we are talking about here is a combination of research, strategic thinking and an approach that is ultimately much closer to Business Development in that it requires an appreciation of where your own business is positioned and where it wants or needs to be combined with an awareness of the external market dynamics. Finally, it demands real choices be made to maximise the chances of success to enable a coherent approach that recognises that the ‘Perfect’ can often be the enemy of the ‘Good’.
Knowing Where You’re Coming From… and Where you Want to go
Rather than being led by what is apparently available, it is always worth putting in the time and effort to develop a proper strategic rationale for acquisitions. This is not only because it will lead to coherent thinking and better choices, not just to help with internal buy-in but fundamentally because when looking for options, a well-defined set of key criteria is a ‘must’. There is a strong need to develop a sense of what kind of business you are looking for before you go out and look.
Given that it is also unlikely that every approach to target will be successful, a number of options needs to be developed. Again, well thought out criteria is the key here in drawing up a select list while discarding others from the ‘long list’.
A strong strategic purpose is also very helpful when initially approaching targets. It is rare that management and owners are only interested in price, although naturally this remains a key element. Management, shareholders and owners often want to hear about why their business is interesting to you, what difference their business will make and where the business will fit into the larger organisation over the next 5 years or so. These questions are often driven by a concern for the rest of the staff but also often the senior management’s own future role. Also, it is natural when people have invested much of their lives in an enterprise to want reassurance that what they have built will not be dismantled carelessly.
Strategic forethought ahead of target screening and before initial meetings have taken place is therefore a great advantage at the start of an acquisition process and leaves an impression of serious intent that can carry a process through many a difficult discussion around price, profit recognition, warranties, etc. Clarity about strategic objectives is essential because these will define your criteria and lead your initial approach. But ultimately, it is not too much of an exaggeration to say that ensuring strategic coherence prior even to initial introductions is what can carry you over the line at the back-end of the process.
What Selection Criteria?
A strategic approach to developing key criteria for a comprehensive screening exercise can also open up a more flexible range of suitable targets; if you know the context in detail you can make better choices regarding how a new entity will contribute.
However, the number of criteria should be limited (no more than 5) and be realistic. The perfect business may be out there…but it’s unlikely! Better still is to design criteria that enable you to grade opportunities and ultimately rank them.
Some realistic sense of ‘availability’ is obviously a key criteria, but not always possible to measure precisely. Other examples of important criteria are;
- size and profitability – Is the business large enough to justify the cost of acquisition? Will it enhance or dilute profit margins?
- geography/region – Does the target have a position in a strategically important country or region?
- sectors – Will the business support the penetration of new sectors, leading to a strengthening of the company’s resilience?
- types of activities, expertise/offering, type of products or services – Are the services or products offered similar or complementary to your own company’s? Will this enhance or detract from the coherence of your current service offering/product portfolio?
- customer segmentation – Will the target allow you to access new customers? Will it allow you to strengthen your position with your existing customers?
- synergies – Not the kind of ‘synergies’ that are anticipated to justify an inflated multiple, but are there genuine opportunities to make ‘1+1=3’ or even more (over time)?
Using a 3rd. Party as an Expert Resource
Victanis has expert knowledge in a number of discrete sectors and important geographies in Europe. But it is often not well understood why it is an outside resource can add real value to a business’s acquisition process, given that in many cases companies have earmarked significant resource for the process in the first place.
Others, such as Corporate Financiers, will often offer company screening exercises in the hope of winning process mandates in the future but not always with the thoroughness and commitment that screening exercises require to successfully deliver an attractive list of acquisition targets. We strongly believe that it is important to ask the question, “Does whoever is screening targets for my business to potentially acquire fully understand:
- MY business – How we do business and where we need to go? And…
- OUR marketplace – Do they know the market intimately? Do they know what acquisitions have worked for others in this sector? Can they bring a depth of knowledge and experience that will cut through the marketing found on websites etc.?"
You need to be assured that whoever is doing the screening understands the process both from the perspective of the target and the perspective of you as an acquiring business. Ultimately, will they have a strong sense of identifying and selecting the best ‘fit’ for the acquirer?
Supporting Preparation for Initial Target Approach
As mentioned before, the initial meeting with a carefully selected target is of critical importance and will often make-or-break a deal right then and there. As a result, detailed preparation is essential.
As part of this a detailed analysis of selected targets that form the ‘short list’ is very helpful. This analysis needs to be of a quality significantly advanced from that used to identify the ‘long list’ of targets. A further refinement of selection, tactics and approach is then possible and is often done best in the course of a workshop with management, M&A director and supporting 3rd. Party expert altogether in the same room to present and analyse. This also has the additional advantage of strengthening and broadening stakeholder buy-in at an early stage. Such a workshop has often been helpful in identifying potential obstacles that were not considered initially.
Even large organisations sometimes struggle to adequately resource this kind of approach, let alone SMEs. But as this preparatory phase is of such importance to the overall success of the acquisition process, we believe it merits serious consideration.
 ‘long list’: An exhaustive process to identify all possible targets in a given sector, country etc. ‘Short list’: the refinement of the ‘long list’ to validated, attractive and realistic targets according to a set of clear and previously agreed criteria.