You can leverage M&A to accelerate strategic shifts and implement your growth strategy, but there are plenty of risks along with the reward.
While M&A is not a strategy in and of itself, it is an extremely powerful tool to amplify your growth goals. You can use it to implement your blueprint while substantially increasing your value in a short amount of time.
You want to boost your performance or “hack” your way to long-term growth? First, you’ll need to determine your strategy, vision, and goals more than simply seeking growth in revenues and market share. What impact would opening new geographies have? For example, moving from a single location in Texas to a presence including Raleigh-Durham and Los Angeles. Maybe the force multiplier for your firm is expanding services. Would your clients see value in your ability to move from an engineering-only firm to a fully integrated AEC firm? How about adding new market sectors such as healthcare and education? While you cannot acquire your way to a healthy firm, you can use M&A to accomplish what’s most needed to put yourself on the long-term track to success.
I am not talking about the old 1+1=3 cliché, but shooting for a 1+1=4 or higher. The example here would be two firms with complementary services working in two separate market sectors. This gives two $10 million net service revenue firms the chance to earn $40 million together. If you are simply looking at a geographic expansion, 1+1=2 is about the best scenario that can be achieved. As a firm with experience in the M&A process, another option is to find and acquire multiple firms instead of fixating on finding the perfect fit in just one. I would recommend this tactic only for firms that have gone through the acquisition processes in the past. There are plenty of potential pitfalls with acquiring one firm and you compound that risk when acquiring multiples. For this reason, you should build cushions into any revenue projections you have for a combined firm and opt to potentially give the seller a bonus or earn-out if they meet or exceed expectations. This will help you avoid overpaying.
Once you’ve solidified your strategy, you must decide how to finance the deal. Cash, equity, and debt are all options, but determining the right combination can be tricky. For instance, if you are looking at an ideal firm in an ideal market, it may be worth paying a premium for access to new skills, clients, and capabilities. While most sellers like to see cash at closing, you could use stock to partially finance the deal. It may dilute your ownership, but 50 percent of a $300 million firm is certainly twice as valuable as 75 percent of a $100 million firm. Any of these options have their own tax, regulatory, and incentive implications, making it critical to build an experienced M&A advisory team you can trust.
Congratulations! You’ve found a firm that will help amplify your strategic growth objectives and you’ve closed the deal. But the work isn’t done yet. In fact, it’s just begun. The next step is integrating the two firms and laying out a compelling vision of what a combined firm looks like to the important stakeholders. This won’t happen on day one. There are separate cultures, personalities, skills, and processes to consider and it will take time to manage the transformation.
The final step is to look back on your goals and bridge any gaps that might exist. Take a hard look at the skills and capabilities your newly combined firm now possesses and what needs polishing. You may need to fill gaps in hiring, training, and to develop additional skill sets to manage the new firm. You may need to go through a new strategic planning process to ensure buy-in from the newly acquired firms, reset goals, and realign expectations. You may have just opened a whole new world of possibilities that did not exist before the acquisition.
The critical point is that you can leverage M&A to accelerate strategic shifts and implement your growth strategy. We exist here at Zweig Group to increase your value and make you successful. If you do it right, M&A is the best the way to make that happen.
Phil Keil is a consultant with Zweig Group’s M&A services. Contact him at email@example.com.