9 Tips for an Effective Acquisition Strategy

Before the pandemic, it was a strong sellers’ market, leaving many prospective acquirers on the sidelines. But recent events have changed that for many industry sectors. We are now in a window of opportunity for acquisitions at lower valuations than in recent history. For those CEOs who wish to grow through acquisitions, now could be the best time to execute transactions for the foreseeable future.

When executing an acquisition strategy, the commodity most wasted is time, resulting in opportunity costs. Given that this window may be short-lived, it is important to be laser-focused on finding the right acquisition opportunities that have the highest probability of helping you achieve your strategic objectives.

Types of Acquisition Strategies and Their Benefits

There are various acquisition strategies, each offering distinct benefits aligned with specific business goals. A common approach is the vertical acquisition strategy, where a company acquires another within the same supply chain, enhancing control over the production process and optimizing costs. Another type is the horizontal acquisition strategy, which involves acquiring a competitor to boost market share and diminish competition.

Lastly, conglomerate acquisitions involve buying a company in an unrelated industry to diversify operations and mitigate risk. By understanding these types, businesses can tailor their acquisition strategy to meet strategic objectives and leverage potential synergies effectively. Below are some points to plan and execute an effective acquisition strategy:

1. Define Your Investment Thesis

Before speaking with any prospect, you need to know why you are reaching out to them. The investment thesis articulates the company’s profile you seek to acquire, identifying the company’s size in terms of revenue, EBITDA, and employees; target geographies; desired product or service lines; and management team and employee considerations.

The investment thesis should define what “success” means, which can be measured by increased revenue and/or EBITDA, employee retention, or client retention post-transaction, among other metrics that demonstrate achievement of the strategic objectives. It is the prism through which the prospects are evaluated as potential acquisition targets.

Identify Target Acquisition Candidates Effectively

Identifying target companies for a successful acquisition starts with a comprehensive understanding of the market landscape and competition. Businesses must conduct a detailed search to pinpoint companies whose product offerings align with their strategic goals and objectives.

Leveraging technology and industry data from reports and databases helps identify businesses with growth potential. Moreover, networking through channels such as industry conferences and partnerships can uncover opportunities to acquire companies not actively marketed for sale, offering more favorable terms. This targeted approach ensures that the acquisition strategy aligns with broader business objectives and maximizes value creation.

2. Create the Financial Model

Part of evaluating a potential transaction is modeling the pro forma financial statements for the combined entity. The model should demonstrate how the acquisition will impact organizational performance as a consolidated business, as well as the inherent risks that should be considered. It is helpful to model a combination with a prototypical organization that is described in the investment thesis, building in the amount of debt that might be necessary to complete the acquisition. This will help identify where the risk may be too high or the reward too low, requiring adjustments to the investment thesis. The financial model is a fundamental tool to evaluate each potential acquisition. Build in the financial data of each target as it is assessed to properly understand the risk-reward of each potential investment.

3. Be Realistic About Price and Terms

Just because the markets have gone through some tough times in 2020 does not mean that a buyer should expect to get good companies at a cheap price. In many sectors, market multiples have declined from recent highs, making it a good time to buy. But expect to pay the market rate for a good prospect. There are reasons that a company is willing to sell for below market, and those reasons are typically ones to be avoided.

4. Plan Integration Now

It is amazing how few acquirers plan for the integration of the company post-transaction. Good integration planning and execution are key determinants of successfully achieving the strategic objectives of an acquisition. Identify the integration team well in advance of an actual acquisition plan for organizational, operational, financial, and technological integration. Everyone has heard the statistics about acquisitions failing to meet their objectives; that is often a result of poor integration planning and execution.

5. Have a Good Story

If a prospect is sufficiently attractive for you to speak with them, then others are probably doing so as well. And how many times have you instantly deleted a message from a buyer because it did not “ring your strategic bell?” The story needs to concisely make it clear that your approach is a carefully considered discussion about a strategic fit that is beneficial for both employees and clients, establishing that a combination has benefits that extend well beyond just financial reward.

Modern channels for acquisition marketing

In today’s digital age, leveraging both traditional and digital channels is essential for an effective acquisition strategy. Social media, online platforms, and industry-specific tools can effectively promote a company’s objectives and broaden its reach. Utilizing these channels helps businesses engage with potential acquisition partners and customers by delivering tailored messages that resonate with specific audiences.

Digital campaigns also provide valuable data insights into customer preferences and market trends, enabling businesses to make informed decisions and adjust their strategies accordingly. Embracing these modern channels enhances the effectiveness of the acquisition strategy and secures strategic partnerships.

6. Find Proprietary Deal Flow

The simple fact of the matter is that companies that run a process with an investment banker usually receive higher prices and better terms for their businesses. While it is true that represented companies are often better prepared to sell and may be more committed to selling, they also will likely cost more. It can prove more economical to find the “proprietary deals” – companies that are not represented and can perhaps be acquired for more buyer-favorable terms. Also, ensure the target list is representative of the participants in the market, not just the ones you are most familiar with, so that the optimal result can be achieved.

7. Leverage Data and Technology in Acquisition Strategies

Integrating data and technology is pivotal in today’s acquisition strategies. Companies must utilize data-driven insights to refine their strategic approach, identify performance gaps, and enhance operations. Advanced analytics tools enable the evaluation of customer trends, competitive positioning, and product development opportunities.

Technology also facilitates the seamless integration of new assets post-acquisition, ensuring operational efficiency and value realization. This approach not only enhances decision-making processes but also optimizes resource management, enabling businesses to achieve their strategic goals and foster sustainable growth.

8. Thorough Due Diligence is Critical

Reasonable due diligence takes time and costs money. Be willing to expend both time and resources to adequately protect your organization. It is crucial for the buyer to fully understand what they are buying. Where applicable, pay for a high-quality earnings report, assessment of HR practices, IP assessments, inventory valuation and obsolescence, environmental diligence, client and vendor diligence, market diligence, etc. Surprises after a transaction closes can range from costly to catastrophic to existential, all of which would be much more expensive than spending the time and treasure on thorough diligence.

9. Be Prepared to Move Crisply

The adage “time kills deals” is particularly applicable in these types of transactions. The buyer should be thorough in vetting an opportunity to avoid risk, but they should move quickly to count them in, move through to close, or promptly count them out. If they are a good fit and survive diligence, document the transaction and close it. Otherwise, count them out and move on. Time is a precious commodity; don’t waste yours or theirs.

The points above help a buyer avoid a significant danger of acquisition efforts: the “shiny object syndrome.” Without a carefully planned and executed acquisition strategy, buyers tend to jump from one shiny object to another without really understanding why they are engaging with them in the first place, which leads to wasted time and costly mistakes. If growth by acquisition is the strategy, then crisp but carefully planned execution often results in optimal strategic outcomes.

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