With the current boom in the merger and acquisition market, many companies are looking to jump into the fray. Before doing so they would be wise to develop a sound strategy, cautions Vistage Speaker and acquisition expert Terry Gambill.
“Too many small-to medium-size companies overlook the critical step of developing an acquisition strategy,” says Gambill. “They get involved in an acquisition simply because it feels good or because they can. More often than not, this leads to unsuccessful deals. Many times it only takes one bad deal to pull down the whole enterprise.”
Before undertaking any acquisition, Gambill recommends the following steps:
- Check your motives. What do you hope to accomplish with the acquisition? Doing an acquisition just because it is there can drain cash, dilute management focus and disrupt your long-term business strategy. Good reasons for doing an acquisition include:
- Expand your customer base
- Improve utilization of resources
- Gain market share
- Decrease competition
- Create acquisition goals. Get very clear about what you want to accomplish with the acquisition and why. Ask questions like:
- What kind of a deal are we looking for?
- Who could it be with?
- How big do we want it to be?
- Why do we want to do it?
- How fast do we want to do it?
- How will it help us achieve our strategic objectives?
- How will it help us become more profitable and strengthen our balance sheet?
- Consider the alternatives. Can you meet your needs with strategic partnerships, minority relationships, private labeling, partnering with customers or other less risky approaches? If you can only achieve your goals through acquisition, then it represents a legitimate approach.
- Develop your acquisition strategy. Establish some key parameters for the deal. What are you looking for in terms of who, what, when, where and why? Determine your critical success factors ahead of time and be prepared to handle them. Success doesn’t mean just closing the deal. It means achieving a significant improvement in your business as a result of the acquisition.
- Create a one-page acquisition criteria sheet. This checklist identifies your most important deal criteria, such as:
- What type of company do you want to acquire?
- What size?
- What price range?
- Public or private?
- Do you want to buy stock or assets?
- Are you willing to deal with the emotional issues of a private seller?
- Keep your criteria narrow enough to avoid diversionary acquisitions, but not so conservative in size and scope that it eliminates all candidates. If you can’t write all your criteria on one sheet, you don’t have clear criteria.
- Build a strong foundation. Too much weight on a weak foundation can pull down the whole business. Start working on the infrastructure (computer systems, management teams, financial planning and reporting, etc.) that will prepare you to manage a larger organization before you get ready to make the deal.”All acquisitions are risky, no matter how good they look on paper,” concludes Gambill. “To succeed, you must have a well-defined and well-executed strategy that clearly answers three key questions: Will the acquisition increase profits? Will it improve the balance sheet? Is the risk acceptable? If you can’t answer ‘yes,’ to all three, don’t do the deal.” Terry Gambill is president of TEGA Inc., a manufacturer of electronics test and measurement equipment. He also helps small and mid-sized companies develop acquisition strategies and negotiate win-win agreements. He assists sellers of private companies prepare themselves and their businesses for sale. Gambill has founded five companies and personally acquired or sold more than 20 companies and product lines. A 10-year Vistage Member in Cleveland, he addresses Vistage groups on the subject of “How to Plan and Execute Successful Acquisitions.”