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Growth Through Acquisition

To accelerate the growth of your company and organic growth doesn’t appeal, consider merging with or acquiring another company.

Such a move can help business owners like you to grow your top line and profitability, says the FD Centre’s CFO East of England North, Lynda Connon. 

A successful merger or acquisition can also give your company access to your target company’s technology, skillsets, markets, and target customers.

If the target company is in a different industry, the merger or acquisition can help to diversify and mitigate risk. 

Considering a diversification strategy like this is valuable if there is any doubt about your company’s prospects for long-term profitability.

The standard form of an acquisition is when one company (the acquiring company) buys another company. 

It does this by either buying all the shares in the acquired company or by purchasing its assets. The shell company is then liquidated.

Likewise, there are several types of mergers, including:

•         Horizontal merger (in which you merge with a company in your industry)

•         Vertical merger (in which your target company is at a different production stage or place in the value chain)

•         Product-extension merger (in which your target company sells different but related products in the same market)

•         Market-extension merger (in which your target company sells the same products as your own but in a separate market)

•         Conglomerate merger (in which your target company is in a different industry and has different products or services).

Growing your business via a merger or an acquisition has many benefits, including the following:

•         To achieve a lower cost of capital

•         To improve your company’s performance and boost growth

•         To achieve higher revenues

•         To reduce expenses

•         To achieve economies of scale

•         To diversify your product or service offering in your existing markets or move into new markets

•         To increase market share and positioning

•         To achieve tax benefits

•         To diversify risk

•         To make a strategic realignment or change in technology

•         To obtain new technology, more efficient production, or patents, and licenses.

Dangers of mergers and acquisitions

As beneficial as mergers and acquisitions (M&As) may be, particularly in terms of achieving fast revenue growth, they are not for the faint-hearted. 

The merger or acquisition process can take anywhere from a few months to a few years depending on such factors as whether the target company is a public or private entity, the negotiations, legislation, and the involvement of financial institutions and other stakeholders.

“The actual transaction can be done very quickly if you’ve identified your target and if all parties are keen to go ahead and legals can be put in place,” says Connon. 

“But typically, a merger or an acquisition takes several months.”

But you also need to factor in the time that will be involved in the identification of suitable target companies as well as the post-acquisition integration.

The post-acquisition integration can take anywhere from six to 12 months, she explains. 

“So the actual transaction itself can be done very, very quickly. It’s the process of identifying the target and making sure it’s something that will work for your organisation as a combined entity and making it happen after you’ve done the deal.”

It’s estimated that of all M&As, 70% to 90% fail for various reasons. 

Many failures are due to a lack of strategic planning and incomplete due diligence, according to Connon. 

They also fail if there is a poor strategic fit between the two companies, a poorly managed integration or an overly optimistic projection of the target company.

The result is a failed growth strategy and a large amount of lost opportunities.

Successful merger or acquisition strategy

So, how can you be sure of being in the 10% to 30% who achieve successful acquisitions or mergers?

Before even starting your search for target companies, it’s essential that you clarify your acquisition strategy and reason for merging with or acquiring a company, says Connon.

Most successful acquisitions happen when companies have identified and understood their own acquisition strategy, says Connon. 

They have clarified the company’s direction over the next two to five years, understand the market challenges for their core business, and know the gaps in their own portfolios and skillsets.

“They also take time to identify potential targets and to subtly review and understand the strengths and weaknesses of each of those target companies,” she adds. 

“Post-acquisition, the ones that tend to fail are the ones where acquiring companies haven’t taken the time to really understand their own strategy or market challenges and what they want from an acquisition. Often, it’s been done for emotional reasons rather than good, sound business reasons. Those companies will typically fail.”

To develop your acquisition strategy, you’ll need to be clear about what you hope to achieve. What is your business model? What do you want to do? Do you want to grow income, to improve profitability, to enhance cash flow? Where are the market challenges in your sector and can you address them all? If you can’t, do you need to make an acquisition? Do you need to merge?

If you conclude that a merger or acquisition is desirable and will be beneficial in the long-term, then you need to develop an “identikit” of what that potential company looks like, she says. 

Every company you consider should be evaluated against the metrics you’ve decided upon.

“Don’t get distracted by personal judgement. If you stick to the metrics you’re looking for, you’re more likely to make a successful acquisition,” she adds.

Due diligence

You and your team of M&A experts need to carry out due diligence and investigate the target company’s business, people (particularly crucial personnel), records and key documents. 

The point of the due diligence process is to uncover any inherent risks in the target business, to question the value placed on the investment or acquisition price and to identify critical issues.

Your M&A team should ask questions and request documentation about the following areas:

•         Corporate information, including the company structure, shareholders or option holders and directors

•         Business and assets, including your business plan, assets and contracts with both customers and suppliers

•         Finance including details of all company borrowings and loan agreements, cash flow statement, business reports, plus all tax liabilities and VAT returns

•         Human Resources including details of contracts for directors and employees

•         IP and IT, including information about IPs, owned or used by the target company and the software and equipment that are used

•         Pension plans that are in place for directors and employees

•         Litigation including details of any disputes or legal proceedings the company is involved with now or in the future along with licenses or regulatory agreements it has

•         Property including information of real estate that’s owned or leased by the target business

•         Insurance policy details along with recent or future claims

•         Health and safety policies that are in place

•         Data protection, including information about how sensitive data is stored and protected and reassurance the target company is compliant with data protection laws

Post-acquisition or merger, you should use your original strategy to measure its success, whether that’s income growth of 25% or improved profits of 2%.

“That would be the target by which you’d measure your combined entity. You’d go back to those numbers and see what have you’ve achieved compared with what you set out to achieve.”

tel: (800) 919-4022
email: [email protected]
www.thecfocenter.com

 

 

Future Proof Your Business

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Thriving in the New World Operator 1

Thriving in the New World Operator

In this series of Thriving in the New World, The CFO Center explores what exactly it means to be an operator in the “new world” and essential elements that allow your business to thrive.

Most owner-operated businesses would agree that increased cash and more access to capital would help them exceed their business objectives.   Recent societal and economic realities have strained or even exhausted cash resources for many companies.   Even those companies enjoying unprecedented growth are scrambling to fund unexpected expansion.   The essential building block for liquidity has always been Operational Excellence, defined as consistent and reliable execution of each business’ unique processes to acquire and satisfy customers.

High performing operations processes have always been the foundation for generating cash from within the business.  Equally important for those business owners seeking to thrive in a post Covid world is the critical need to demonstrate operational excellence to third party financing sources.  Seeking to expand your credit line with your bank or pursuing additional investors will require the business owner to present a clear and compelling story for how the company will produce profits, cash and sufficient return on capital.

The traditional role for a CFO in Operational Excellence is to provide accurate financial information and act as leading voice in cost reduction.   Creating a truly reliable foundation for generating cash and profits; often requires financial leaders to contribute more than they have ever before.  The experience, attributes and mindset of many CFO’s positions them to act as a catalyst for delivering cash and profit maximization across the full range of business processes.

Fix the Finance Foundation

The processes and practices of the finance function must be viewed as rock solid by the owner and the rest of the organization to create a path for participation or preferably leadership of broader operational improvement initiatives.

There are three key functional outcomes that must be in place to give the finance team the credibility to extend its involvement to other operational processes.  Without these deliverables in place, the organization’s ability to undertake deeper process review will be severely impaired.

The first base level capability is timely, accurate and useful financial reporting.  If the leaders of the company are not receiving this level of financial reporting, then it is unlikely that the finance leader has earned the right to apply their team’s expertise to general operating processes.

The second must have competency from the finance team is an understanding of the cost drivers for the business. The understanding of costs does not have to be perfect; however, there must be a methodology in place to capture and analyze the complete range of items that form the cost of  products or services

The third requirement for finance team effectiveness is to have a solid grasp of the company strategies that will drive future growth and success.   If your finance staff are seen just as number crunchers it will be difficult for them to contribute to operational initiatives.   The first installment of our CFO contribution series suggests a practical approach to engage your finance leader in developing future proofing strategies.

Own Cash Flow

The responsibility of generating positive cash flow clearly belongs to the CEO and the entire organization; however, expanding the mindset of your financial leader to thinking and acting as the owner of cash flow can be a powerful tool.   Finance and accounting staff have historically only been tasked with producing cash flow forecasts based on inputs from other leaders.

We suggest making a clear organization signal showing reliance on the finance team to go beyond analyzing cash inputs and outputs. The new expectation should include concrete actions aimed at increasing the amount or timing of cash inputs while reducing the amount or timing of cash outputs.  One example of a high impact cash inflow recommendation is to convert the finance team’s experience with both external and internal obstacles to timely collection of receivables into operational practices that eliminate these obstacles in advance.

Refine and Revolutionize Business Processes

Each organization varies in complexity of business processes, capabilities of process analysis, and often very different levels of CEO interest or prioritization of process improvement initiatives.  Given the nature of many small to medium-sized organizations, there can often be aptitude and attitude gaps leading to under prioritizing  detailed data-driven process review work.

Even a small finance team can become the internal champions for generating improved results achieved through documenting and enhancing your most critical processes.   Elevating the CFO to, at minimum, a shared level of ownership with the firm’s operational leaders will apply complementary expertise to process review efforts.  Converting process improvements into additional cash and profit can often involve just a few additional questions that may be missed by other functional areas.

Create Compelling Capital Acquisition Content

There is a high probability that pursuing operational excellence will lead to capturing more cash from optimized processes and deliver positive returns in the short term.

The longer-term benefit of intense CFO involvement in the operational aspects of the company is the ability to work with the owner to put a more convincing investment case forward to potential sources of debt or equity financing.   Revenue growth is understandably the primary focal point for future investment; however,  the business case is significantly strengthened by a tangible action plan showcasing gross margin enhancement, profit improvement and positive cash generation.

Reviewing, examining and revising processes has always been part of running a successful enterprise.  Although most companies have made improvements over the life of their business; there is often a substantial opportunity to further optimize the organization’s capability to convert every dollar of revenue into more profit and more cash.   One of the positive byproducts of the turmoil related to the pandemic is that business owners, management and employees are more aware and likely more open to the need for change than ever before.   The time is right for businesses to count on their CFO to bring a thorough, disciplined methodology to deliver operational excellence and improved financial results. Uncover more.

Future Proof Your Business

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Thriving in a New World Strategist

Thriving in a New World Strategist

In the introduction to our CFO Contribution Series, Thriving In the New World Strategist, we suggested that most business owners may not be well served by high-level, third party driven, divergent strategic exercises. Certainly, there is significant value in undertaking far reaching, blue sky thinking. Most small to medium size organizations will be better served by incorporating their own foresight into targeted, most probable future scenarios developed by highly engaged participants directly linked to the success of the business.

There can be no doubt the Covid-19 pandemic has led to unprecedented change for most businesses. Revenue levels have plunged for some firms while others are experiencing unexpected increases in new customers and unforecasted demand levels. Supply Chains have been disrupted. Optimizing employee productivity and satisfaction have become more art than science. Short-term cash availability and long term capital requirements are highly uncertain. Even the most confident experts are reluctant to make a call on the economic climate we are likely to experience a year from now or even six months from now.

Success in this uncharted New World requires business owners to make effective decisions to address today’s challenges and to establish a strong market position in an uncertain future. We call this Future Proofing your business. The path forward will be unique for every enterprise. For most businesses, the contribution of an integrated senior financial leader can be a major factor in making the best decisions for steering the business towards a successful future.

Owner operators will particularly benefit by injecting their full time or part time CFO into idea

generation and implementation planning to future proof their business using the following four-step process.

Developing Most Probable Future Scenarios

The insight of the CEO along with sales and market-oriented management will understandably be essential to develop and select three or four most likely market scenarios. Important dimensions for assessing your business’ future would include revenue outlook, new revenue sources, changes in access to customers or preferences of customers, competitive forces, regulatory factors and assessment of staff effectiveness. Identifying these factors specific to your business and your industry should be considered in conjunction with the team’s projections of potential future operating environments.

Involving a holistic professional with the ability to stretch the team’s future thinking to include the full spectrum of potential obstacles often leads to more robust, more complete future scenarios. Team members should expect the organization’s financial leader to embrace the uncertainties inherent in guessing at potential futures while also expecting them to act as a catalyst to describe the leading scenarios with sufficient clarity to facilitate resiliency testing and implementation planning.

Leveraging Emerging Technology

The pace of change over the past five to ten years combined with the recent accelerated societal and economic changes linked to the pandemic forces all businesses to adapt and respond quicker and more intensively than ever before. Adapting and responding effectively requires timely and appropriate application of emerging technology solutions to uncover new connections to customers and to unlock methods to streamline and enhance business processes.

A few of the more pervasive and perhaps highest potential technology trends destined to shape the future are Artificial Intelligence, Blockchain Technology and Internet of Things. Finance leaders bring essential analytical skills, as well as opportunity and risk assessment expertise. These attributes will help the business select the most advantageous solutions and deploy these applications to deliver favourable returns.

Stress Testing Scenarios and Strategies

Once the business has collaboratively generated their high probability future scenarios and articulated corresponding strategies to maximize results; a critical need emerges for disciplined evaluation to ensure the selected paths forward can stand up to expected obstacles and deviations.

The CFO’s involvement in scenario testing is likely to be most accepted and welcomed by the business owner and the future proofing team. A New World CFO is one that passionately embraces uncertainties and optimism while maintaining their proven ability to rigorously apply a check and balance approach to the team’s chosen future scenarios and strategies.

Commitment to Highest Impact Initiatives

The hardest decision for many organizations undertaking future proofing activities during today’s tumultuous environment will be to commit the necessary financial and human resources to those chosen few initiatives expected to best position the business over the next six months to five years.

Creating the internal and external confidence to act now often hinges on the development of concise, compelling business cases to define the initiative, its costs and expected profits. The involvement of your financial leader in the entire future proofing process will significantly enhance the quality and effectiveness of these strategic business cases. In situations where the organization is seeking external financing or participation from partnering organizations; the voice of an informed, engaged, credible CFO will be a significant factor in securing the desired external support.

Business owners and their management teams have the responsibility to navigate the firm through today’s urgent challenges and opportunities. They also bear the greater responsibility to establish direction and take action to prepare the organization to succeed for many years ahead. A New World CFO welcomes this responsibility and possesses the knowledge and dedication needed to deliver results today and in the future. Discover more.

Future Proof Your Business

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