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Weekly UpdatesFundamentally, stimulating business growth can be achieved two ways. One is organically, through a developed plan to increase sales and marketing activities. In difficult economic times however, this approach is not necessarily the most effective or feasible one to take. The ability to grow sales may be limited by any number of factors, from the weakening U.S. dollar, increased travel costs due to the price of fuel, to inherent limitations in terms of one's product line or market reach.
An alternative way to approach growth is externally, through strategic acquisitions. For a well managed and financially strong company, an economic downturn can often prove to be the ideal time to consider an acquisition strategy.
Finding the right acquisitions for profit
During tough economic times, many tend to view acquisitions as the practice of acquiring a business in distress; however, this is far from being the case. In fact, the "bargain basement" approach often carries with it more risks than rewards over the long term. With a well-defined strategic plan, and a keen eye for the right opportunity to complement an existing business model, an acquisition can prove to be the deciding factor in overcoming any growth hurdles a business may be encountering.
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We are entering an opportune time for businesses to consider a strategic acquisition beyond at-risk companies. With the impending retirement of an aging baby boomer population, there are numerous companies being put on the market as part of the owners' succession planning efforts. While many of these businesses have not necessarily suffered from the weakening economy, a growing number of owners are accelerating their exit plans just to be sure. These owners may be at a point in their business careers that they simply don't have the fortitude to survive through an economic downturn.
Of courses there is never any shortage of companies that are facing distressed circumstances, especially those that are dependent upon a U.S. customer base or focus on an economic sector that is going through change. This presents an alternative opportunity for acquirers with the right financial strength to leverage the more diverse business opportunities these companies can bring. Of course, these should be approached with extreme caution--and put through an appropriate level of due diligence.
Understanding your options
There is no simple formula when approaching a potential acquisition opportunity. Through our many years of helping organizations enhance the value of their business, our firm takes into account a myriad of factors, not the least of which is; the financial condition and management capabilities of the company under scrutiny when planning a successful acquisition. The greater the financial duress, the higher the risk. In some cases, taking on a distressed company demands quick decisions and reduces the time allowed to perform the appropriate due diligence. When that happens, you must weigh the potential risk that goes along with rushing the transaction. If the purchase price can not be adjusted for the related risk, sometimes the best move is to simply bow out.
It is also essential to look at the make-up and capabilities of the management team and its compatibility with your own business model. Where gaps or shortcomings exist, you must assess your ability to fill or replace them. Will the talent on board integrate with your operations and flourish, or will it migrate to other companies? Again, this should be considered in placing a value on the target company.
Where the business owners are integral to the success of the business--it is vitally important to assess the quality of the second tier management structure in order to gauge the company sustainability over the longer term. If the internal management structure is weak, the risk factors increase significantly. In addition, if customer relationships are inextricably tied to the individual shareholders or vendors of the business as opposed to the business itself, the acquisition in question may not be as appealing as it first appears.
Further, it is also important to have a full understanding of your own barriers to growth. For example, if your road to future success lies in expanding geographically, but the capital cost commitment of setting up your own operation is too high, then an acquisition strategy may be the ideal approach. By way of example, an Ontario-based company in the steel sector may be looking to expand sales in Western Canada. The cost of shipping product from Ontario to Western Canada would far outweigh the benefits of ramping up production to meet capacity. In this case, acquiring production facilities closer to new markets would be a viable option.
A supplier of seasonal products to a small but lucrative base of big box retailers could protect itself by leveraging acquisitions in order to diversify its product mix and customer base. With the right strategy, this would allow the business to smooth out the ebbs and flows of its sales cycles and expand its distribution channel to encompass smaller, independent retail customers.
Developing a plan
Some factors to assess when developing a strategic acquisition plan are:
* The potential geographic range and/or sales growth.
* Range of purchase prices and cash flow requirements.
* Competitive factors.
* Risk levels and tolerance.
* Timing requirements to perform due diligence.
* Internal management capabilities and core competencies.
* Quality and longevity of the new management team.
* The quality and stability of the customer relationships.
* How integral the business owner is to the company's ongoing success.
* Staff integration issues/requirements, including management, human resources and operations.
* Financing commitments before going to market and identifying acquisition targets.
In today's uncertain economic climate, or even when the financial landscape is thriving, no acquisition is without risk. However, with a thought-out strategy and the right expertise on hand, healthy businesses can significantly reduce those risk factors to drive stronger, more profitable results.
Michael Epstein is the managing partner for Fuller Landau (www.fullerlandau.com), a Toronto-based, mid-market public accounting and business advisory firm. Fuller Landau has more than 50 years of experience working with clients to develop business strategies that will facilitate innovation and growth and help them adapt to changing market trends. It also specializes in ownership transition, mergers and acquisitions, and operational change management.
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