Companies generally pursue acquisitions in three different ways. These sourcing approaches are defined AS:
The acquisition addresses the opportunities and challenges raised in the defined Strategy.
The acquisition is made in response to an outside approach in a market that has previously been identified as attractive by the strategy development process
The acquisition is made in response to an outside approach in a market not previously considered as an attractive option in the strategy.
So back to our Strategic, we typically recommend that focus should be on Highly Synergistic and Strategic acquisitions. This is not to say that certain companies can’t succeed in taking a complementary or diversifying approach to acquisitions, however, our experience is that the likelihood of enticing a target company to sell and the likelihood that an acquisition is ultimately successful is significantly increased when you are pursuing acquisitions that are closer to the company’s core. For evidence of this difference, look no further than the inevitable increase in corporate divestitures in a slow economy when companies focus on their core activities and decide to sell off non-core businesses.
We’ve seen many companies start with a stated goal to only pursue strategic acquisitions, but then somewhere along the way they lose their focus and begin to pursue anything and everything that might be for sale. Alternatively, we sometimes have new clients who believe they should diversify through acquisition, but typically conclude that the risks outweigh the benefits once we discuss the factors noted above.
Narrowing down the Strategy
If you make the decision to focus on Highly Synergistic and Strategic acquisitions, you’ve already come a long way to establishing a viable acquisition strategy.
The next step is to really flush out some of the details.
- Which growth objectives can be achieved more successfully with an acquisition versus internal sales and marketing resources or a greenfield start up?
- What product or service area do you intend to be the focus of your first acquisition campaign?
- What types of synergies do you expect from acquiring a company in this industry segment?
- Do you have a minimum profitability hurdle in mind?
- What is the maximum size you are comfortable acquiring? You should talk with your financial institution to get a sense for borrowing capacity.
- What is the minimum size of a company you might acquire? Buy too small and you’ll incur a high relative cost to getting the deal done.
- How many companies do you believe meet the criteria from your answers to the two questions above? This can be a guess at this point, but it is important to think through.
- How many acquisitions can your team execute and integrate in a given year?
- What acquisition pace makes sense over the next five years?
How to Conduct a Successful Acquisition Search
For your reference, we’ll speak to one important investment criterion mentioned above— acquisition size. Our clients are typically middle-market companies that have revenues ranging from $10 million to $100 million per year.