Acquisition Growth: Factors to Consider
June 7, 2023 •Oak Street Funding
How do they do business?
Why are they selling?
Who owns the relationships?
Are client relationships healthy?
How are the numbers?
Can they solicit clients or compete?
Are they compatible?
Acquisition growth vs. organic growth
Acquisition growth offers advantages over organic growth since it happens more slowly and can be offset by normal client attrition. And, if the attrition rate is not accurately forecasted, owners can find themselves merely breaking even.
While the focus is typically on the revenue side, there are many advantages of acquisition, including the benefits of scale, such as more efficient marketing, re-energizing staff, and the ability to leverage greater value from technology.
Generally speaking, prudent acquisition growth typically offers the fastest, most cost-effective way to increase income quickly. Also, acquisitions often provide a strategic way for owners to take their companies to the next level.
When to pursue acquisition
If you’ve considered purchasing another business, now might be a good time. M&A activity is still strong and as the Baby Boomer generation retires in increasing numbers, opportunities to acquire will continue to be widely available. If you are considering an acquisition before 2024, begin the process now to finish the deal before the end of the year.
Find the right acquisition growth opportunity
If your goal is acquiring another business or its client base, finding the right opportunity that fits your needs is critical to achieving expected results. Before your search begins, give some thought to what would constitute an ideal acquisition.
- Would it be a business (or businesses) in your current market or elsewhere?
- How large a company do you want to acquire, both in terms of revenue and staffing?
- Would you like the seller to stay on your payroll as an advisor or consultant?
- Do you prefer a profitable company that’s generating substantial revenue, or are you willing to pay less for a struggling operation that needs better management and offers synergies to save on overhead expenses?
Successful businesspeople know how to tap into knowledge and advice from various experts. This is especially important when it comes to acquisitions. Build a team of external experts who are experienced in the acquisitions and keep them involved throughout the entire process. They will provide additional viewpoints and identify issues you may not have considered.
Be sure to do your homework before retaining a professional or signing a contract for services and, again, consider seeking referrals from colleagues who have used outside advisors in their own acquisitions.
Whether you are considering debt or capital to fund your acquisition, find a trustworthy partner to secure your acquisition funding. Your relationship will continue beyond the deal’s closing, and a long-term relationship may form.
Perform due diligence
If there’s a single secret to a successful acquisition, it’s exhaustive due diligence. While many buyers find the process long and tedious, the more you know about the business you plan to acquire, the better you’ll be able to integrate it into your own company. Failing to perform adequate due diligence is a key reason many acquisitions fail.
To protect your financial interests and professional reputation, answer these questions:
How do they do business?Few owners will volunteer every bit of information you need, especially the negative aspects. Check business references, investigate regulatory agency reporting, and perform online research to turn up any irregularities.
Why are they selling?There are many legitimate reasons for putting a business on the market, such as retirement or succession planning. Still, some sellers may be trying to evade financial or legal problems. Make sure those problems don’t become yours.
Who owns the relationships?Find out which employees clients value most. If clients are fiercely loyal to a particular employee, do what you can to keep that person on board. Ensure that appropriate non-solicit and non-compete agreements are in place for key employees. If a key person leaves, make sure you can find a suitable replacement.
Are client relationships healthy?How long have clients been with the business? Consider the breakdown of the client base, average account size, and similar factors. If your acquisition does not include an earn-out provision with clawbacks, make sure that what the seller represents as revenue is accurate. As you review clients, estimate how likely they will continue as clients.
How are the numbers?Don’t settle for pro forma financials. Have your accountant compare actual tax returns with management fees, compute ratios and margins, and examine the level of non-operating expenses. Watch for nonrecurring items that might artificially inflate income levels.
Can they solicit clients or compete?Have your attorney ensure that your purchase agreement includes ironclad non-solicit and non-compete agreements for the owners who might be tempted to take clients to another company or set up a new one.
- Do you do business in ways that are similar to the current owner? Do you have a similar client service philosophy? Since the answers are seldom quantifiable, you’ll have to rely on observations as well as your gut instincts.
Find the value
Finally, don’t allow your emotions drive the process. The seller is excited at the prospect of a large influx of cash, while you’re excited about the opportunity to grow.
An accurate valuation is critical. Finding this involves both some art and some science. Several formal models are in wide use, so it becomes a matter of choosing the one that’s right for you. That choice and the number it ultimately provides are subjective but will provide a crucial stepping stone in your decision whether or not to acquire.
Using acquisition as a growth strategy can be both exhilarating and daunting. Acquiring, however, is a great way to take your business to the next level. If you are considering this strategy and don’t know exactly where to begin, please feel free to contact us. At Oak Street Funding, we have experts in lending who have helped hundreds of clients make their acquisition goals a reality.
Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.