CEO Advisor Newsletter October 2017
Strategic Acquisitions for Accelerated Growth
Some of the key questions to consider are: How quickly do you want to grow your company? How to best achieve your desired growth goals? Organic growth by selling and adding more clients? Creating new product/service offerings? Expanding into new verticals or new geographic markets?
For a closely-held business, growth is often achieved through all of the above. And while organic growth is an integral part of the plan, aggressive growth goals typically mean a strategic acquisition strategy, which can benefit you in many ways.
Strategic AcquisitionsThe most common acquisition strategy is to buy another company with cash, seller financing, stock, an Earn Out or a combination of these four. Regardless of the structure, an acquisition is meant to create synergy that makes the value of the resulting company greater than the sum of its original parts or be accretive.
Through the strategic acquisition of another company, the acquiring company can achieve economies of scale, obtain key talent and intellectual property, efficiencies and enhanced market visibility. The acquisition can also increase the company's client base, add substantial revenue, expand into new markets, and increase shareholder value and other benefits.
Strategic acquisitions are attractive to CEOs and business owners of closely-held businesses whose companies are strong financially. Growth companies with a strong management team are effective at integrating acquisitions, and are better able to manage the accelerated growth. It allows them to expand their core capabilities and product offerings.
Strategic acquisitions can yield tremendous benefits, but there are five important criteria for you to consider:
1. You Must Have a Solid Business ModelA solid business model including Gross Profit Margins of 70 - 80% for software companies or 50 - 60% for service companies with recurring contracted revenue, need to have (versus nice to have) products and services and 15 - 30% Pre-tax Net Profits in a very large and sustainable market of identifiable prospects and customers.
2. You Must Have a Strong Corporate Management Team You need to surround yourself with a strong management team; seasoned managers who know your business and can build on your company's corporate culture. They should understand the marketplace in which you operate and key drivers as to why customers buy. Having the right management team will make for a smooth transition during and following an acquisition.
3. Your Business Needs to be Financially StrongIf your business is financially solid with a proven track record for success, you are well positioned to take advantage of acquisition opportunities. Company strength can be characterized by your company's financial assets, lack of debt, recurring revenue, client base, equity in equipment, depth and breadth of talent, etc. Your business must be prosperous now and be well positioned for the future with a solid, strategic growth plan.
4. You Must Have Access to CapitalYou will need to make sure you have access to capital and the borrowing capacity needed to complete your acquisition. Regardless of the state of the economy, access to capital can vary by region and by provider. Often as the owner of a closely-held business, you can look to regional and community banks for your borrowing needs. Seek out lenders who are knowledgeable of your business and plan ahead for all the capital you will need.
You can also partner with a private equity firm as an equity investor that can provide additional capital for acquisitions provided you meet their criteria. Seek help from an M&A advisor such as CEO Advisor, Inc. if your planning involves growth capital from a private equity firm.
5. You Must Have Expertise in M&A or Access to M&A ExpertiseThroughout the acquisition process, it is important to work with a trusted advisor. Detailed planning with acquisition experts makes for improved decision-making and helps you avoid pitfalls, such as over paying or lacking to properly conduct Due Diligence.
For companies looking to grow through acquisition, an M&A advisor, such as CEO Advisor, Inc., should explain the acquisition process upfront and help you to understand the financial consequences of your acquisition options. In addition to discussing the risk factors, the M&A advisor should also explain the potential benefits to your company.
A strong M&A advisor will manage the entire acquisition process from preparation, to creating your target list of companies, to drafting and negotiating the Letter of Intent, Due Diligence, collaborating with your corporate transaction attorney and tax advisor.
Strong companies with aggressive growth plans, strong management teams, a good business model and access to capital can take advantage of acquisition opportunities, provided you have the needed expertise to guide you through the process. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. today for a no cost, no obligation meeting at your office to discuss your growth issues at (949) 629-2520 or email MHartsell@CEOAdvisor.com.