CEO Advisor Newsletter March 2020
The key is having the right team of advisors consisting of an M&A/business advisor who will initiate and lead the team and work closely with the CEO, a seasoned corporate/transaction attorney and a CPA or tax advisor. The M&A/business advisor is the liaison between the CEO, attorney and tax advisor. The M&A advisor also does all of the planning, creates a list of target companies, contacts these companies, requests initial information, creates and negotiates the Letter of Intent, coordinates the entire Due Diligence process and assists the CEO through the legal documents with the corporate/transaction attorney by negotiating business aspects of the acquisition.
An acquisition creates value through at least one of the following five strategies:
- Accelerates access to additional products and services
- Improves the performance of the acquired company to build value in the acquiring company
- Eliminates competition
- Acquires expertise or technologies more quickly or at a lower cost than if they were built in-house
- Creates the opportunity for scalability
The goal of an acquisition should be very clear. Five Acquisition Strategies: Accelerate and Expand Products and ServicesSmall companies with innovative products have challenges reaching the potential market for their products and services. IBM pursued a similar strategy in its software business in the past decade when it acquired 43 companies. By pushing the products of these companies through IBM's global sales force, IBM estimated that it was able to accelerate the acquired companies' revenues as much as 40% in the first two years after each acquisition.
Improve the Target Company's Performance Improving the performance of the target company is one of the most common strategies to create sales and value. When you acquire a company to improve sales, marketing and its products, as well as, reduce costs and expenses to improve Gross Margin and Net Profit, you substantially increase shareholder value. Keep in mind that it is easier to improve the performance of a company with low Gross Margins and low Net Profits than that of a high Gross Margin and high Net Profit company so acquiring a nominal performing company may be a good strategy.
Eliminate Competition and Excess Capacity from the Industry As industries mature they typically develop extensive competition and excess capacity. By eliminating competition you also gain market share, increase sales and even expand your products and services. Additionally, you eliminate downward pricing pressure and create the opportunity to increase your Gross Margins company wide.
Acquiring Expertise or Technologies Faster or at a Lower Cost Technology companies acquire other companies that have expertise or technologies they need to enhance their own products and services. They can acquire the technology more quickly than developing it themselves, avoid royalty payments on patented technologies, and keep the technology away from competitors. They can also gain valuable expertise in a cohesive team with far more efficiencies than hiring individuals.
Acquiring a Business for Industry-specific Scalability Creating economies of scale are often a key source of value creation in mergers and acquisitions. Economies of scale can be important in creating value with purchasing power or other areas that can benefit from larger volumes. This can substantially increase Gross Margins, Net Profits and value of the business.By focusing on the types of acquisition strategies that have created value for acquirers in the past, CEOs can utilize acquisitions to create substantial growth and value for their shareholders.
Negotiations in M&A deals are extremely different from any other negotiations of the day-to-day business world. With the right M&A advisor, you will feel completely comfortable pursuing strategic, opportunistic acquisitions.
CEO Advisor, Inc. has the expertise and experience to help you through this process of acquiring companies. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Boost Growth & Profits in 2019
2. Sales GrowthGrowth is a must for every company to increase profits. Growth requires sales management, goals, planning and the creation of a sales and marketing machine. Target your top 100 prospects to optimize new business development. Also focus on your top customers to expand, upsell and cross-sell to maximize profits.
3. Gross and Net Profit Margins As a CEO focusing on profits, your Gross Profit Margin (GPM) (Sales less Cost of Goods Sold ( COGS)) is the primary financial metric to measure on a consistent basis. Make sure your financials are set up to track Revenue, COGS and GPM so you can determine what products and services generate the most money, as wells as, which products and services are subpar and need some changes, or to be discontinued. Target between 50 - 60% GPM to maximize Net Profits, higher GPM for software companies.
4. Cost of Goods Sold (COGS)COGS are the direct costs to provide your products and services, and helps you calculate how profitable your products and services are (before overhead expenses). Your Cost of Goods - materials, direct labor, outsourced contractors, customer service and other costs related to producing your products and services are critical to your Gross Profit Margin (GPM).
5. Motivate and Manage Your Team The energy in your workplace reflects the level of enthusiasm, urgency and intensity of focus as expressed by the people working in your company. You need people engaged. You need your staff to care. And you as the leader need to be responsible for energy and urgency in order to maximize your profit potential. This can be tracked by developing reporting and metrics and updating these reports monthly and real-time in some cases to hold your employees accountable and gauge your progress.
6. Company InnovationAre you constantly looking for ways to process orders quicker, create customer reports faster, save money by honing an internal procedure, and develop new products and services?
Company innovation is a global mindset in your company that is consistently improving how you do business. The impact of having your employees constantly innovating is a huge driver of profitability for any company. The key is to balance focus and execution versus innovation.
Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520 or by email atMHartsell@CEOAdvisor.com for a no cost initial consultation.