Strategic M&A Search: Making a Connection

This is part one of a two-part series on the acquisition process, written by Jamie Claire Kiser, Director of M&A Services, and Ryan Renard, Financial Analyst/Consultant. Part one focuses on the search phase of an acquisition, part two will discuss the process from contact to closing. I’ve heard the same question several times during recent strategic planning sessions that Zweig Group has facilitated for our clients: “Should we buy a company to grow?” With so much attention focused to the industry’s recent and forecasted consolidation phase, M&A is a hot topic in the media and in discussions with our clients. The question shouldn’t really be whether or not a company should grow through acquisition. The question should be if the firm is prepared to handle the acquisition process. The decision to grow through a strategic acquisition can change a company’s growth trajectory and add immediate value to the firm’s bottom line. That’s the best case. The worst case is a firm blindly stumbling through the process, sucking up months – or even years – of time with nothing to show for it, or with a botched acquisition that drains considerably more resources. An acquisition growth strategy is a major commitment and needs to be the direction that all of management agrees to pursue. Acquisitions, even successful ones, require coordination, fast action, resolution to see the “big picture”, and, of course, a significant amount of time and money. The purpose of this article isn’t to scare would-be buyers off. Instead, it’s to help firms considering an acquisition strategy gain a better, albeit basic, understanding of the process. There are several steps to preparing for and executing a strategic search for a new merger or acquisition target, and there are plenty of resources out there that take this discussion to a scholarly level. Instead, we are going to explain the process using a tried-and-true analogy that everyone understands: finding your soul-mate. Creating a dating profile: Despite what we tell ourselves, everyone has a “type” in dating, and every firm needs to recognize the “type” that interests them in a potential acquisition. The work begins with a clearly defined growth strategy. Identifying the characteristics of the potential targets helps narrow your search to a manageable scale and provides objective parameters for the discussion. You don’t ever want to be in the position of pitching a firm to your partners because the owner is a “really nice guy.” Know what you want, write it down, and seek it out. Discussing the answers to questions like these with your partners will help make sure that you are all in agreement from the outset, which will speed up the process when you actually begin courting firms. Talking through strategic objectives and goals will benefit your firm immensely, and not just in regards to an acquisition. Some questions (among many): Is your firm interested in growing their home geographic area? Improving design strength in a pre-existing sector or discipline? Or is your firm looking to strike out and diversify through a new geographic area, market sector, or discipline? How will you finance this growth? What are the characteristics of the ideal firm? What values are important to your firm, and how will you transfer your culture? What do you do well that you can immediately bring to a new firm? Pre-dating, a euphemism for stalking: At this point, you know what you want and you’ve filled out that online dating profile, uploaded a flattering photo, and paid your subscription fees. You’ve seen a few pictures, they look like they match your profile, and now you’ve got to figure out if they’re even available or interested before you waste your time trying to impress them. It’s the exact same when you want to acquire a firm. This is where your basic research begins; you have to start compiling a list of all the companies you think would be a good match to the criteria you set forth. Don’t underestimate the time and leg-work required for research. Have you ever seen an engineering firm with a “For Sale By Owner” sign slapped across the front door? Instead of opening up an app and swiping left and right to find a match, you have to contact dozens – if not hundreds – of firms to determine if they would even consider being acquired, let alone whether or not they meet your criteria. The initial contact has to be made with absolute discretion, especially if you are contacting targets located close to you, to avoid scaring the employees of the target firm. We usually begin with a brief, one-page letter sent to all possible targets asking them to contact us if they are interested in learning more. The contact letter is directed to the president or owner of the firm. If we don’t get a response to our contact letter, we follow up with an email. Since we don’t take the hint as well as many online daters, we reach out to the firms that didn’t respond to either the letter or email with a phone call. Brace yourself for rejection. It stings less over time. Flirting: After you’ve narrowed your list to only firms that are interested in talking, you have to do some more research before you can commit to taking them out for a first date. In dating, you have to look this person up, make sure they aren’t wanted for felonies, and verify that the attraction is at least based in reality (Photoshop can really work magic!). In acquisitions, after you have a list of possible targets, and have skimmed away the ones that aren’t interested in talking to you, use as many resources as are available to you to find out everything you can about the remaining firms on the list. This will allow you to make some cuts right away and save you time later down the road. The next step is to set up preliminary phone calls with the firms remaining on the list to try to get to know them better before you ask them on a date. Ask the firm owner or executive about their basic characteristics and maybe a little backstory. There’s very little information available in the public realm for these companies that will let you see much beyond their market sector, discipline, or geography. It’s better to have a more expansive list from the start, and whittle down the possible matches from there instead of relying on the accuracy of the internet. Even if they meet your profile in terms of all three characteristics, their website won’t indicate if they excel in their field or the portion of revenue they generate from each of their market sectors. Does the firm have a designation (such as DBE, MBE, etc.) that wasn’t obvious on the website? How many owners come with the firm? Are the rainmakers planning to retire next week? Are they a size that you can afford to purchase, or are you going to have to give up some power and go with more of a merger-style transaction? You don’t have to get into a lot of detail at this point. The goal here is to verify that the firm fits the basic outline of your profile. You’ll have plenty of time to get to know the firm better when you’re further down the road. Part two of this series will be posted next week and will pick up after the initial information-gathering phase of an acquisition, beginning with what we are calling “The First Date.”