Developing an Acquisition Strategy
When setting out to buy and operate a business, it's essential to begin with a well thought out business plan. If you're planning to partner with other investors such as a Private Equity (PE) group, your plan is critical to getting your financial team on board for the acquisition campaign. It is your vehicle to educate and motivate the investor as well as to demonstrate that you're the type of executive who develops strategic plans.
If you're buying the business with your own capital, it's just as critical to have a well thought out strategy. The discipline of articulating a strategy will guide you in finding and assessing acquisition targets. It will also give you a basis to determine what you will pay for a target company.
To begin developing your plan, think about the intersection of three areas:
1. Your goals. What is it that you want to do? How long do you want to do it for? Where do you want to live, etc.
2. Your experience. What have you already demonstrated the capability to succeed at? Are you strong in sales, manufacturing, distribution etc. What specific industry knowledge have you built?
3. The opportunity. What industry segments have the right dynamics for a winning strategy? For example, do you plan to succeed because it's a high growth sector or do you plan to consolidate companies and occupy the top position in a shrinking market?
When your desires and experience intersect with a good industry segment strategy, you have the foundation for your plan.
Next, flesh out the strategy by developing a business plan document or presentation. Your plan should answer five important questions:
1. Business Description What are the characteristics of the company that you propose to buy? This should include size, industry, geography etc. You should also discuss the industry in which the company operates including a discussion of its overall size and growth. Is the industry dominated by a few big players? How are U.S. companies doing in the global market? Take the time to do the research on the industry. This will also help you gain credibility with prospective sellers while enhancing your own knowledge base.
2. Opportunities What is your plan to grow the business? You should include both top and bottom line growth in your discussion. Are you looking for a troubled company where you can create value or a company that's already on a fast growth trajectory? Do you foresee additional acquisitions? If so, what are the attributes of the prospective add-on companies. What will the business look like as your plan moves forward?
3. Threats What are the risks that could impact the future success of the business? Is offshore manufacturing a factor? If not, why not? If so, what's your plan to deal with it?
4. Exit Strategy If you contemplate seeking investment capital from a PE Group having thought about and being able to articulate an exit strategy is very important. Who are the likely buyers? Are there examples of recent transactions that support your plan? What will you need to accomplish before the company is ready to exit? How long do you think it will take?
5. Leadership How do your skills and prior experience qualify you to execute the strategy? Do you have a track record of success in the same industry? If not, you should be prepared to show how your prior experiences prepared you for the particular challenges involved in operating this business?
Once you've developed your plan, test it out. You may want to start with professional colleagues such as your attorney, accountant etc. The more knowledgeable that your audience is and the more willing they are to question your assumptions, the better. The people who give you the most critical feedback are doing you the greatest service.
When you present to potential investors or lenders, expect some tough challenges. Try not to be defensive. Instead, learn from their concerns and refine your presentation for the next time. Business plans typically improve with multiple iterations.
Essentially your strategy will become the roadmap for your acquisition campaign. It will serve you well at every stage. You can use it to help locate companies, seek investors and lenders, assess the value of companies and structure the deal. Most importantly, as you get caught up in the heat of the chase, it will help you to assess whether the deal that you're working on is really going to be right for you.
About the Author:Michael B. Ribet is a partner at Capital Results(http://www.capitalresults.net), a Chicago investment banking firm which assists "bankable" entrepreneurs in acquiring large companies in conjunction with Private Equity groups. He can be reached at (312) 541-6232 or mike@capitalresults.net.
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