January 2025 Newsletter
Making Successful Acquisitions for Growth – 7 Strategies
- Acquisitions are a great way to accelerate growth and profits and can substantially exceed growth from your organic growth efforts. Completing a bolt-on or small add-on acquisition is very doable for companies of all sizes with the right advisory team in place.
- Completing an acquisition and ensuring its success long-term is the magic formula that eludes too many companies. Private Equity firms make one large investment in a hub or portfolio company and then build tremendous value in that company by making multiple add-on acquisitions as their primary strategy.
- The key is having the right team of advisors in place from the very beginning consisting of, 1) an experienced M&A advisory firm such as CEO Advisor, Inc. that will lead the acquisition initiative from start to finish by working closely with the CEO, 2) a seasoned corporate/transaction attorney and 3) a CPA or tax advisor. The M&A advisor is the liaison between the CEO, attorney and tax advisor, and will advise you and work on the acquisition every step of the way to achieve results.
- The M&A advisor also performs all of the planning by working closely with you, creating a list of target companies, contacting these companies multiple times and tracking all activities, requesting initial information, creating and negotiating the Letter of Intent, coordinating the Due Diligence process and assisting the CEO through the legal documents with the corporate/transaction attorney by negotiating business issues of the acquisition.
- Acquisitions create value through one or several of the following seven strategies:
- Accelerate and expand market access to new products and services
- Improve the performance of the acquired company by building value through efficiencies and economies of scale resulting in increased profits
- Eliminate competition and excess capacity from your industry
- Acquire management expertise or technologies more quickly or at a lower cost than if they were built in-house
- Create the infrastructure for scalability
- Use seller-financing to leverage your ability to make acquisitions at lower financing costs
- Build tremendous value in your company for an optimal future exit and sale of your business
- 7 Acquisition Strategies
- Your goal or strategic rationale for an acquisition should be very clear. The following is additional information on these seven strategies.
- 1. Accelerate and Expand Market Access to New Products and Services
- Smaller companies with innovative products have challenges reaching the potential market for their products and services. IBM pursued a roll-up strategy in its software business between 2010 - 2013 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.
- 2. Improve the Performance of the Acquired Company
- Improving the performance and efficiency of the acquired company is one of the most common strategies to create value. When you acquire a company to improve sales, marketing and its products, as well as, reduce costs and expenses to improve Gross Profit Margins, cash flow, 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 Profit Margins and low Net Profit Margins than that of a high Gross Profit Margin and high Net Profit Margin company, so buying an underperforming company at the right price and terms can be a big win.
- 3. Eliminate Competition and Excess Capacity From Your 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 can eliminate downward pricing pressure from less competition and create the opportunity to increase your Gross Profit Margin company wide.
- 4. Acquire Expertise or Technology Faster or at a Lower Cost
- Technology companies acquire other companies that have strong management, expertise or technologies they need to enhance their own sales, marketing, 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.
- 5. Create the Infrastructure 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, infrastructure or other areas that can benefit from larger volumes. This can substantially increase Gross Profit Margins, Net Profit Margins and the 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 value for their owners and shareholders. Negotiations in M&A deals are extremely different from any other negotiations of the day-to-day business world and far more complex than buying or selling real estate. With the right M&A advisor like CEO Advisor, Inc., you will feel completely comfortable pursuing strategic, opportunistic acquisitions.
- 6. Use Seller Financing to Leverage Your Ability to Make Acquisitions at Lower Financing Costs
- Using seller financing is very doable with smaller acquisitions and can benefit both the buyer and seller. Buyers want easy, lower cost financing, and many sellers want to spread out the payments for the acquisition to lower their taxes and spread them out over three to five years.
- 7. Build Tremendous Value in Your Company for an Optimal Future Exit and Sale of Your Business
- It is a known fact that size (Revenue) matters and a larger company will fetch a larger EBITDA multiple, and therefore a higher sale price when you ultimately sell your company. If you don’t have an Exit Strategy in place now, you should speak with an M&A advisor such as CEO Advisor, Inc. to start working on optimizing the value of your business today.
- CEO Advisor, Inc. is a hands-on M&A advisory firm with the expertise and experience to help you through this challenging and exciting process. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Maximize Growth in 2024
Most CEOs perform annual planning to grow their business and increase sales and profits, as well as, increase the value of their business. However, there are certain methods companies must use for implementing a growth strategy. As growth and M&A Advisors to CEOs and business owners of small and mid-size companies, CEO Advisor, Inc. focuses on optimizing the growth and value of a business long before an owner decides to sell.
A growth strategy to expand your business is critical to accelerating its growth and should be a primary focus of the CEO and management team. Common growth strategies include:
Market PenetrationMarket ExpansionProduct ExpansionDiversificationAcquisition
Market Penetration
One growth strategy in business is Market Penetration. A small to mid-size business uses a Market Penetration strategy when it decides to scale its existing products and services within the same market. The only way to grow using existing products and markets is to increase market share. Market share is the percent of unit and dollar sales a company holds within a certain market vs. all other competitors. This requires a strong sales strategy, can include hiring a larger sales team, implementing a reseller channel, and effective marketing.
Market Expansion
A Market Expansion growth strategy involves selling current products and services in new markets either in new industries or new geographic markets or both. There are several reasons why companies consider a Market Expansion strategy. First, the competition may be such that there is little room for growth within the current market. If a business does not find new markets for its products, it cannot grow or increase sales and profits - in fact, profits will decline over time. A business may also use a Market Expansion strategy if it finds new uses for its product and services and sometimes this can occur at higher margins based on a higher utility of the products/services.
Product Expansion
A business may also expand its product line or add new features to increase its sales and profits. When companies employ a Product Expansion growth strategy they continue selling within the existing market. A Product Expansion growth strategy often works well when technology starts to change and greater demand for its products and services materializes in a more mature market. A business may also be forced to add new products as older ones become obsolete.
Diversification Strategy - New Products to New Markets
Growth strategies in business also include a Diversification growth strategy where a company will sell new products to new markets. This type of strategy can be risky and companies will need to plan carefully when using a Diversification growth strategy. Market research is essential because a company will need to determine if customers in the new market will potentially like, need and purchase the new products or services, and this may also require hiring a larger sales team or creating a Reseller Channel in this new territory.
Acquisition
The above growth strategies focus on organic growth, and most CEOs and business owners focus solely on this strategy. Growth strategies in business can also include inorganic growth through Acquisitions. With Acquisitions, a company purchases the Stock of another company, or purchases the Assets of a company without taking on the liabilities to expand and grow. A business may also use an Acquisition Strategy to expand its product line or technology products, enter new markets, gain a stronger management team and a valuable sales team or an established reseller channel, as well as, acquire needed talent and deeper management team.
An Acquisition growth strategy can be more risky, but not as risky as a Diversification strategy. One reason is that the products and market are already established with an Acquisition strategy and you are acquiring contracted customers and Revenue. A company must know exactly what it wants to achieve when using an Acquisition strategy, mainly because of the investment required to implement it.
CEO Advisor, Inc. specializes in advising and implementing growth strategies to grow small and mid-size businesses to the next level. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. for a no cost initial consultation at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
A growth strategy to expand your business is critical to accelerating its growth and should be a primary focus of the CEO and management team. Common growth strategies include:
Market PenetrationMarket ExpansionProduct ExpansionDiversificationAcquisition
Market Penetration
One growth strategy in business is Market Penetration. A small to mid-size business uses a Market Penetration strategy when it decides to scale its existing products and services within the same market. The only way to grow using existing products and markets is to increase market share. Market share is the percent of unit and dollar sales a company holds within a certain market vs. all other competitors. This requires a strong sales strategy, can include hiring a larger sales team, implementing a reseller channel, and effective marketing.
Market Expansion
A Market Expansion growth strategy involves selling current products and services in new markets either in new industries or new geographic markets or both. There are several reasons why companies consider a Market Expansion strategy. First, the competition may be such that there is little room for growth within the current market. If a business does not find new markets for its products, it cannot grow or increase sales and profits - in fact, profits will decline over time. A business may also use a Market Expansion strategy if it finds new uses for its product and services and sometimes this can occur at higher margins based on a higher utility of the products/services.
Product Expansion
A business may also expand its product line or add new features to increase its sales and profits. When companies employ a Product Expansion growth strategy they continue selling within the existing market. A Product Expansion growth strategy often works well when technology starts to change and greater demand for its products and services materializes in a more mature market. A business may also be forced to add new products as older ones become obsolete.
Diversification Strategy - New Products to New Markets
Growth strategies in business also include a Diversification growth strategy where a company will sell new products to new markets. This type of strategy can be risky and companies will need to plan carefully when using a Diversification growth strategy. Market research is essential because a company will need to determine if customers in the new market will potentially like, need and purchase the new products or services, and this may also require hiring a larger sales team or creating a Reseller Channel in this new territory.
Acquisition
The above growth strategies focus on organic growth, and most CEOs and business owners focus solely on this strategy. Growth strategies in business can also include inorganic growth through Acquisitions. With Acquisitions, a company purchases the Stock of another company, or purchases the Assets of a company without taking on the liabilities to expand and grow. A business may also use an Acquisition Strategy to expand its product line or technology products, enter new markets, gain a stronger management team and a valuable sales team or an established reseller channel, as well as, acquire needed talent and deeper management team.
An Acquisition growth strategy can be more risky, but not as risky as a Diversification strategy. One reason is that the products and market are already established with an Acquisition strategy and you are acquiring contracted customers and Revenue. A company must know exactly what it wants to achieve when using an Acquisition strategy, mainly because of the investment required to implement it.
CEO Advisor, Inc. specializes in advising and implementing growth strategies to grow small and mid-size businesses to the next level. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. for a no cost initial consultation at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
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