One day, the owner of a security services company – a man with weighty credentials that uniquely qualified him to provide the services he offered – died after a very brief illness. The number-two person in the company did not possess these credentials—yet he assumed the top spot and took over day-to-day operations as CEO.
Eventually, the new CEO decided to explore an acquisition path and called in transactional advisory professionals from Skoda Minotti to consult and offer guidance. Our professionals sat down with him and asked fundamental questions: “What specific goals will acquisition help you meet?” “What will it add to the enterprise—a new geographic territory? A new service line? A new way to boost income exponentially?”
The answer was as shocking as it was forthright: “I have no clue,” the gentleman answered. “I read in an article that growth occurs through acquisitions, and I want to grow, because that’s how we’ll make more money.”
As this story suggests, business acquisition does not begin and end with the transaction itself. Building a winning mergers and acquisitions (M&A) strategy starts with planning, and planning should occur well in advance of any discussions with potential targets. Furthermore, that planning process should be thorough, and 100 percent honest.
If your company has a strategic plan in place, any planning conducted for purposes of a potential acquisition should align with it. If it doesn’t, then you should either adjust that strategic plan accordingly, or if you can’t or won’t do that, you should reconsider the whole idea of acquisition. Likewise, does your company have mission and vision statements? If so, revisit them, and make sure they accurately reflect your growth objectives. If you don’t have mission and vision statements, now is the time to create them. Let’s look at both.
Your mission statement articulates what your company does and explains its reason for existence. Understanding that purpose in clear terms will help you and your leadership team determine if a potential acquisition could enhance that greater purpose, as well as the ways in which that might occur. If such an acquisition could lead your company to deviate from its purpose, the repercussions could be far-reaching—and usually negative.
Your vision statement must reflect what you (you being the acquiring company) want to be in the future. It should focus on the long-term aspirations of your company. Without a vision statement, you won’t really know what type of acquisition (if any) is appropriate.
Once your company’s mission and vision statements are refined or created, you (the owner), your management team, and your advisors will have the foundational knowledge and resources necessary to begin reviewing target companies—and evaluating the extent to which they complement your company vis a vis these statements.
This takes us to the next stage of M&A strategy—developing a Target Value Statement.
Once you’ve identified a potential target company, you and your team will conduct some basic research. That’s fine. Yet before due diligence begins, before economics of a transaction are discussed internally or between both parties, and certainly before a letter of intent (LOI) is drafted (let alone signed), the target’s value proposition to your company (i.e., the acquirer) must be identified and articulated.
To do this, you and your team need to answer some basic questions, including, but certainly not limited, to:
- What value will the transaction bring to your company?
- Will it expand your footprint?
- Will it help you sell new products to your existing customers/clients?
- Does the target company have a loyal base of its own existing customers/clients?
- To what extent would the acquisition open new channels or markets to your company—assuming such opportunities represent appropriate fits?
- How would you qualitatively characterize the target company’s culture? Do you envision a smooth transition post-acquisition, and how well do you really believe each company’s culture will mesh?
The answers to these and other important questions form the basis of the target value statement. Once it’s finalized in written form (it can be a statement, a summary, a series of value points or whatever format best suits your style), you and your team then need to ask the most important question of all:
Does this value statement align with your company’s mission and vision statements?
If it does, then the target company merits further consideration. If it doesn’t, then you should close the case on that company and look elsewhere for suitable targets.
Summing It All Up
Companies consider acquisitions for many reasons. Given the currently low cost of capital and the ever-quickening pace of technological advancement, it makes good sense to at least consider a strategic or financial acquisition if it opens new avenues of growth or unlocks doors to potentially valuable customers/clients.
Whatever reasons may be relevant to you and your team, your first order of business must be evaluating opportunities in relation to your company’s mission and vision statements. Does the target align with your purpose? Will it help you achieve your vision? These are the first questions you must answer. All other questions, steps and decisions emanate from this.
Do you have questions about developing a winning M&A strategy, or are there other transactional challenges you face? Please contact Ken Haffey, CPA, CVA, CGMA, CFP at 440-449-6800, email Ken or visit http://vlas.skodaminotti.com/valuation/merger-and-acquisition-valuation.