- December 06, 2016
Expansion Via Acquisition
As a buyer, you could be looking to grow your business through acquisition. You might even be sitting on some cash, or, have the capacity to leverage cash to execute a deal. You know your competitors and begin to target some for discussions; in addition, you research other companies and could aim for those as well. You want to spend a certain amount of money and feel pressured (perhaps by your CFO and board) to pull off the deal of the century. As a smaller business with no M & A team, you begin the journey without a formal process; instead, you follow your gut to “get something done.”
The One Mistake and The Three Fits
Some target companies are geographical fits, others will provide vertical market expansion, and others will simply make your business bigger. Focused solely on price, off you go to find some company that you believe will be a great fit. Unfortunately, you will waste a lot of time with this method. It is true that price is important, but the optimal way to approach a target is to test the company in terms of strategic fit, cultural fit, and financial fit–in that order.
Strategic Fit
The first thing to consider: is it strategic? When the company I formerly led targeted Nexus Oncology for acquisition, we knew they were a strategic fit: they were a mostly European CRO (contract research organization) doing clinical trials in Oncology. My company, Ockham, had not yet expanded to Europe, and we also needed additional Oncology expertise and clinical divisional strength. On the other hand, it was a good fit for them as well: Nexus had a very small presence in the US, did not possess a clinical data piece (we did), and lacked cash to grow. In short, this was an excellent symbiotic strategic fit.
What are your strategic needs? Who do you know that has what you need? What do you have that the target does not have? Your strategy should not be just to grow, but to acquire an entity that is going to help you provide more value to your client and the marketplace.
Cultural Fit
The second thing to consider: can you integrate culturally? Some might think this is putting the cart before the horse, as you have not made an offer and preformed due diligence; therefore, how can you know the culture? In speaking and meeting with the owner prior to making an offer, focus some of your questions on how they run their business, treat their employees, manage their employees, and most importantly, try to understand the CEO’s background and personal life (spouse, kids, etc.). In this way, you can get a good feel for the company’s culture.
I remember meeting with a certain owner, and as we toured the office he was not greeting the employees—and they were not making attempts toward him either. There was very little energy in the building as most team members kept to themselves. In addition, they had a flexible work-from-home policy, and, had a play room for the employees. I quickly realized that we were not going to fit with this company culturally: we said hello to each other in the hallways, had a much stricter work presence policy, and did not have an entertainment room.
Therefore, make certain that you spend time on financials and exit discussions, but do not forget about the business culture. You want to find a company that shares the same business values, processes, and policies.
An Additional Benefit of Finding Fits
Once you have identified both a strategic and cultural fit, the seller will be on board, which in turn means that both parties want to reach an agreement, so potentially messy financial discussions should go easier.
Financial Fit
The third thing to consider: is the situation a financial fit? Can you afford to buy the business? Do you need to finance the purchase? Is the company weaker financially than you had thought? Ultimately, what is the seller willing to accept for the sale of their business?
In the Nexus deal, we achieved a great strategic fit and a similarly excellent cultural fit; the Nexus CEO and I hit it off as well, which only added to the momentum. A review of the financials revealed that they were not as profitable as we had thought; however, they had a healthy backlog so we were confident we could use our expertise to make them profitable. We also knew that we would have to finance part of the deal and had to get the LOI (letter of intent) executed before we could secure financing. After lengthy price negotiations with the seller we agreed on price, secured financing, did our DD (due diligence), and closed the deal 90 days after signing the LOI.
Photo by Mike Kononov
Final Thoughts
Like any negotiation, we hit a few rough patches, but we could not have closed the deal without confirming a strategic win/win for the buyer and seller. We could not have closed without personal and cultural rapport as well; we knew we would mesh post-close. I learned a valuable lesson that financials are the third most important part of negotiating an agreement. Unfortunately, most of us start with the numbers before determining a strategic and cultural fit. In some ways acquiring a company is like the courtship before marriage: you need to get to know the person before you propose. Remember that sellers are making decisions that will change their work lives and (sometimes even) their personal lives forever. By proceeding in this order to find the three fits, you are guaranteed not to miss great opportunities.
