One of the first observations that any savvy executive will make when researching acquisitions is that the failure rate is typically 70% or higher. Of course, this begs the question of what metrics define failure but, in general, it means that most acquisitions do not meet the initial goals and expectations of both the acquirer and the acquired company. This is a troubling statistic, and there are not many walks of life where a 30% (or lower) success rate would be tolerated.
The flip side of this equation is that, for companies that do acquisitions well, there is a golden opportunity today to leverage acquisitions to not only meet growth objectives but also to change the competitive playing field going forward. For business sellers, doing acquisitions right is critical to capturing fair value for your efforts, establishing your legacy, and ensuring that you and your estate have a secure future.
At Avalon we specialize in working with companies on the “Buy Side” i.e., companies that are looking to use acquisitions to enhance and accelerate their growth strategy, applying our deep strategic analysis and discipline We also are adept at helping business owners on the “Sell Side,” that is, in achieving the best outcome for their business through a sale process. Our goal is to maximize acquisition success for our clients, given the factors that you can control in the process. A deeper dive into our approach follows.
Lewis Carroll, the author of “Alice in Wonderland,” once made a very astute quote that can readily be used to describe the acquisition process employed by many companies in the middle market:
“If you don’t know where you are going, any road will take you there”
The rabbit hole may look interesting but there’s limited consideration given to how an acquisition maps to key strategic considerations and what factors might be most influential in determining success or failure. In addition there are often investment bankers lurking around corners ready to pounce on a business owner/operator with their latest deal(s).
At Avalon we specialize on the buy-side in working with executive teams and business owners to do the necessary groundwork up front to maximize acquisition success. We work collaboratively to identify what key factors are critical to the success of an acquisition and map to the strategy and objectives of the acquirer. These factors typically fall into two categories, which include:
- Performance Characteristics, such as business growth, revenue, profitability; and,
- Synergy, or “softer” characteristics, such as the quality of the management team, manufacturing capability, engineering bench strength etc.
Some, but not all, of these will be shared across companies and even then, the specific requirements for a company can vary widely depending on the business, executive team skills and growth strategy. The intent of our process is to try to match closely our client’s desires with the candidate’s capabilities.
We develop quantitative algorithms to rate each characteristic and, from there, determine high potential acquisition candidates. An example output for a client is below, in which the company targets that rated most highly on both the Performance and Synergy scales are to the northeast quadrant of the graphic (with names disguised).
These companies represent the logical first candidates for us to approach as part of the acquisition effort.
If you are a privately held business owner looking to sell your business, the number of paths that lead to suboptimal outcomes mirror those on the “buy side” but differ in scope. If you have a healthy business the range of interested buyers could be expansive, and each potential buyer carries a different set of short and term objectives, valuation criteria and expectations around deal structure. It is in your best interest to think strategically and holistically about the range of possible buyers and their expectations, as well as the optimal timing of, and method of approaching, prospective buyers. Some questions to think long and hard about include:
- Which companies would be best positioned to create value from my business and, consequently, may be willing to pay more?
- How much involvement, if any, do I want in the business going forward? Would I be willing to act in a consulting capacity in transition?
- Am I willing to accept deferred payments to meet my valuation objectives or estate planning goals?
- Do I have flexibility in the timing of sale?
- Do I have an internal option (i.e., family member or employee/executive) to consider?
- Are there major risks to my business if the market finds out I am for sale?
- Are market conditions in my industry favorable for a sale right now?
Avalon can help bring clarity to all the different considerations involved in a sale transition, understand the different types of buyers and advise on what you best options will be. We have found that the strategic analysis, discipline and process we employ to identify best fit candidates on the buy-side works equally well on the sell-side. The decision is rarely straightforward, and the considerations involve multiple tradeoffs.
Sometimes, the best answer may be to not sell if you have flexibility to build to a better outcome in the future, or the best buyer for your business is not the obvious one that your initial intuition (or that pesky investment banker) tells you.