Mergers & Acquisitions

Acquisition strategy: How proactive acquisitions can work for you

Buy or build? That is the question.

There are two primary ways that CEOs and CFOs can grow their businesses. One is by increasing sales, a strategy that is often referred to as internal or “organic” growth. The other is by buying or acquiring another business, known as “inorganic growth.”  Business owners in today’s competitive marketplace often ask themselves whether buying other companies would be a more efficient path to achieving their growth goals.  There are plenty of middle-market business owners who want to buy other businesses, but don’t necessarily know the best way to go about the process. While the potential gains of successfully acquiring businesses can be enormous, the risks are very real. In turn, it’s important that acquiring business owners take a strategic and thorough approach to finding the right business to acquire.

Building a pipeline

All too often business owners describe themselves as “opportunistic” when it comes to making acquisitions. Meaning, if someone approaches with an attractive deal, they will consider the offer to purchase the company. What business owners need to be aware of is that opportunistic acquisitions are generally not an ideal strategy in today’s competitive market. Alternatively, a CEO should be treating his acquisition target list like a sales pipeline. CEOs hoping to grow through acquisition cannot expect to acquire consistently without a strong pipeline of potential targets, which should reflect the company’s broader strategic growth goals. Deals regularly go sideways or fall through for a number of reasons.  With diligence and negotiation periods that can span months at a time, having issues arise mid-acquisition is almost inevitable. It’s important that business owners be proactive in order to maintain strong backup options so if the current deal they’re working on falls through, they have a contingency plan.  Beyond just ensuring that a deal gets done eventually, however, building a proactive acquisition pipeline affords a number of other benefits.

Leverage and choice

The more leverage you have as an acquiring business owner, the more likely you’ll be satisfied with the outcome. Having leverage in mergers and acquisitions (M&A) is generally is the result of optionality. When evaluating strategic acquisition targets, CEOs should strive to have a number of prospects to compare and contrast. Size, region, and culture, among others, are all variables that could affect an acquisition’s long-term viability. History shows that in at least half of all cases, after the deal closes, the acquiring company is dissatisfied with their return on investment. In the worst case, a misguided opportunistic acquisition can have crippling effect on the consolidated organization.  In turn, it’s crucial to maintain a robust acquisition pipeline to gain the optionality necessary to make the best purchase possible.

Maximizing your time

Searching for and performing due diligence on prospective businesses to acquire can be a time-consuming and arduous process. It’s crucial that the CEO maintains their focus on the operations and profitability of the company while evaluating acquisition targets. In turn, business owners generally look to platforms (such as Axial) to efficiently build a pipeline of targets that fit their acquisition criteria. Taking a proactive approach of formulating a strategic acquisition pipeline versus reacting to opportunities is a great way to ensure you’ll end up closing a deal that satisfies your company’s growth goals.

Category: Mergers & Acquisitions

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About the Author: Jordan Spivack

Jordan Spivack is a manager at Axial, the online network that connects CEOs to capital and acquisition opportunities. His group is dedicated solely to the owners and operators of private middle-market companies. On a daily basis, Jordan work…

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