2010 may be an especially opportune time to solidify market position and really become a kingpin in your niche, by combining with the opposition. Combination with a significant competitor may be a bold and sometimes scary move, but it also is one of the fastest ways to build market share quickly, and can be an excellent mechanism to obtain special industry talent or capabilities.
Our firm is currently working with several outstanding middle market companies, which have thought about sale, but would prefer another year or two of recovery from the recent slump in the economy before they make their move. Several of these strong performing mid-sized players have watched their competition grow thin and weaker over the past year. Their entrepreneurial sense of opportunity tingles with interest. Maybe, with the right moves today, they could soon be contemplating sale of an entity twice as big!
It is a prudent thought, in that by increasing focus through competitor acquisition, or alternatively, solidifying your business foundation by disposing of unrelated business segments, you almost inevitably enhance value.
In spite of the growing numbers of prospective buyers in today’s business market, only a small percentage will actually succeed in buying, and buying well. Buying well means never having to say you’re sorry. The object of the game is to look back on the acquisition 3-5 years later, with the ability to think, “Thank goodness we made that move”.
The following short list highlights some of the most important elements to successful acquisition.
1. FOCUS YOUR SEARCH
Focus your search for acquisition candidates on the specific segments most appropriate to and most tailored to fit with the long term direction you seek.
It is frighteningly easy, in the secretive world of mergers and acquisitions today, to become aware of only a few opportunities – which may be ill “fits” for your company. When you’ve decided to use acquisitions as a mechanism for growth, it’s easy to find yourself with only a short list of possible targets. This is especially true for those who are inexperienced in the search process.
Plan to spend time and money to really research the prospects possible in your segment, who may consider sale. In reality, this is not a small thing. You may dedicate one top manager for the better part of a year, or you may spend $5-10k per month for 6 months or more to have qualified M&A professionals search the market for you. However, this is a small cost in total for making a truly great acquisition.
Also, if you find yourself with a choice between the ideal candidate at a slightly “too high” price, and a bargain-priced alternative that fits less well, do yourself the favor of leaning toward the perfect fit, even at a higher price. You will fare better in the long run, almost certainly. The successful acquisition is the one you look back on five years from now, and are pleased with. To achieve that, FOCUS your shopping efforts toward the ideal fit with your own long term growth strategies.
2. SEEK SYNERGY
The ideal acquisition candidate allows the combined resources of the two now merged companies to do better than either one could have done alone. That may mean capitalizing on the things you do really well, to expand and strengthen the acquired company to all new heights. That may mean shoring up your existing operation by acquiring new strengths that you know you need.
We recently sold a company which made an outstanding pet deodorizer product. Their roots were clearly in the pet market, and yet their product had the potential to fare well in every household product market in the US. We sold them to an organization which had a much broader distribution reach. The company is doing wonderfully with the new owner group, and the management team is valued and beloved. It’s truly a 1+1=3 fit for the buyer.
3. MOVE QUICKLY AND QUIETLY
Sellers value confidentiality. They are skittish and very guarded about consideration of sale, and they do NOT tolerate slips of the tongue well. Rightfully, sellers have great concern about their key management staff becoming fearful of acquisition, or of key customers who might seek alternative or “back-up” supply sources.
The buyer who respects these concerns and who behaves accordingly, limiting access and information to only a small handful of management level staff, will have a much higher chance of consummating the transaction successfully.
Also, speed counts. Every seller worth acquiring has alternatives. If you move slowly or indecisively, you only encourage that seller to spend time and effort in developing those alternatives.
4. LISTEN TO THE SELLER
Every seller has unique concerns, personal and tailored to his own situation, which impact his view of alternative prospective buyers. One may be distraught about your future intentions regarding his key management staff. Another may be very tense about his personal future role in the company (either wanting ongoing involvement for a few years, or, alternatively, wanting freedom as quickly as possible post close.)
The more you listen to and HEAR such seller worries, and try to adapt your approach to allay those fears, the more likely it is that you will successfully close.
Our firm sells middle market companies. We have closed in excess of 100 transactions in the $10-200 million dollar size range. More than half of those transactions closed with a buyer who was NOT the highest bidder. In every case, they were close enough to the top to be competitive, but often the seller picks the buyer for reasons broader than only top dollar. Every seller wants a buyer who will keep his company strong, and who will be good to his valued people. Sellers also want to work forward with a suitor who they think they will actually FINISH with. (They don’t want a false start, and they don’t want to find themselves starting over on sale two months from now.)
Listening well to the seller’s concerns and tailoring your proposal to make a good faith effort to address those concerns may well make the difference between winning the acquisition or not.
In contemplating acquisitions, timing is critical. Today can be a wonderful time to grow through acquisitions. Stressed competitors may sense potential for great relief by combining forces. Also, in these less than certain economic times, the strength added through effective business combinations can make a tremendous difference in your long-term viability and “staying power”. Talented management additions can quickly shore up any weak spots, and reduce vulnerability.
Regardless of the reason for your acquisition desires, or your position as you search, the acquisition business is one with great dangers and great rewards. The best of the best will do it well, and will look back with a smile on 2010.
