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Are you seeking to expand by acquisition, should you consider appointing a buy-side corporate advisor?

I come across many companies or investors which are seeking to expand through acquisition that just give their details to corporate advisers and business brokers in the hope that they come across deals that may be candidates.

Whilst a reactive approach should be part of the process, the serious acquirers will appoint a corporate adviser to actively identify and approach target companies.

The first step in an acquisition process is to fully understand and clarify the objectives for a potential acquisition.  I like using the Porter model of industry structure to frame the objectives.  Michael Porter’s Five Forces Model is a useful framework to gauge the impact of the trends in an industry and who are the likely winners and losers.  Porter considers that the five key forces in an industry are suppliers, customers, substitutes, potential entrants and direct competitors.

How is the acquiring company attempting to change the power balance in an industry structure through an acquisition?  Some of the following may impact the strategic acquisition approach

• – technology
• – supplier concentration
• – customer concentration
• – internationisation of trade
• – government legislation
• – consolidation of your competitors into larger groups.
• – substitutes

Considering their strategic positioning is even more important for small and medium sized businesses as they may be the target of acquisition plays, become irrelevant in rationalisations and may be squeezed by the increasing power of customers and/or suppliers.  The adage that in a maturing industry is that you need to 1) get big, 2) get specialised or 3) get out.  How is the power shifting in your industry and what are you going to do about it.

The search process and preliminary review with the client of potential targets also help clarify what is or is not of interest, whether that be access to new markets, expanding market share, access to technology or vertical integration.

We had a client who started with an extremely broad brief which we progressively narrowed down before the search.  However, none of the many businesses we ran past them were deemed suitable, despite being within their target criteria.  Finally we identified that they really only wanted to buy one company, which after multiple approaches we determined that it would never be for sale.  We both left dissatisfied with the process – as far as I know they still have not made an acquisition.

In my opinion, now is a good time to get serious about acquisitions

• – baby boomer are retiring in increasing numbers
• – smaller and medium sized businesses are capital constrained due to the new banking capital adequacy rules
• – technology M&A and IPOs are strong
• – the stock market has had a good start to 2015

 

Endeavour Capital can assist either buyers or sellers of businesses achieve their strategic outcomes.  We also strongly recommend that a business becomes exit ready and take succession planning actions 2 – 3 years ahead of time to maximise the result.