Acquisitions Can Be Growth Strategies for Manufacturers and Distributors
Owners of manufacturing and distribution businesses are always in pursuit of growth. Whether you mean to grow in size or revenue, or perhaps expand into new markets, organic growth is usually part of the plan. But if your goals are more aggressive, a strategic acquisition might be the right path for your company.
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In fact, acquisition is becoming a more attractive growth scheme for many in the industry. CLA’s most recent survey of manufacturing and distribution company leaders shows a sizeable jump in acquisition activity, with 10 percent of respondents purchasing other businesses, compared to 5 percent in the previous year.
Acquisitions can indeed be a viable way of adding the new capabilities, customers, capacity, and geographic presence you need to reach your growth goals. But before you get in on the action, make sure you fully understand the process and are certain that your company is properly positioned to absorb a whole new enterprise.
Acquisitions should achieve specific goals
In most acquisitions, a company buys another company with cash, stock, or a combination of the two. As the purchasing company, the transaction should bring you economies of scale, efficiencies, and enhanced market visibility. Ideally, the acquisition should also expand your company’s client base and talent pool, add new capabilities and markets, and help increase shareholder value, among a variety of other benefits. If an intended or potential transaction doesn’t accomplish specific goals and deliver advantages such as these, it’s probably wise to reconsider the acquisition.
Positioning is everything
Before you shop the market for potential acquisition targets, your own business should be in very good health. Your company is best positioned to acquire another when you meet four essential criteria:
- Your company is prosperous — It must be profitable now and well positioned for the future with a solid strategic growth plan.
- A solid business model is in place — It should be reflected in a strategic plan that identifies acquisition needs.
- You have a strong corporate management team — The right executives will help smooth the transition during and following an acquisition.
- You have access to capital — Cash reserves or a healthy borrowing capacity are needed to complete an acquisition.
Initiating an acquisition process
The first phase of the acquisition process is to search out and engage a compatible company for purchase. The main objectives here are to prequalify the acquisition target as a solid strategic fit and determine, as best you can, if its owners are reasonably willing and able to see a transaction through to completion.
There are typically two ways you can approach your target. You can either pick up the phone and start a frank conversation, or you can engage an investment banker or other intermediary to act on your behalf while you remain anonymous.
On the other hand, it may be you who is sought by the target. You might receive an invitation to bid on a business, usually because it is on the competitive auction block and looking to sell. In either case, there are different processes, benefits, and risks.
Reaching out to your acquisition target
Once you’ve had initial conversations, whether openly or anonymously, and your target has expressed interest in exploring a sale, you’ll both engage legal counsel and submit a confidentiality agreement (CA) so you can move forward with in-depth, bilateral discussions. The CA legally binds all involved parties to keep all information about the target and the prospective transaction completely confidential. If you begin the process with anonymity, the veil comes off at this point, and your identity as the potential purchaser is revealed.
The main benefit of the direct reach-out approach is that you can usually pursue discussions with your target while its owners aren’t actively engaged in selling the company. Working outside of a competitive bidding situation can partially mitigate the risk of overpaying for the business as well as being forced to keep pace with local potential buyers in a formal managed sale process. You’ll also have more flexibility and leverage in dictating the transaction’s terms and pace.
There are benefits for your target, too, such as a potentially shortened and more discrete transaction process, which could minimize the risk of confidential strategic or competitive information leaking to the market. But the target’s owners may also think some of their negotiating power has been diluted and that they won’t get the “full” value price they might otherwise land in a competitive auction. This can bring talks to an impasse.
Sometimes, the target company consents to the exploratory process without any real intentions to sell the business. Its owners figure they can simply do a “market check” on what their business is worth in advance of launching a formal competitive auction process.
For these reasons, when you reach out to a target (rather than the other way around) there’s a lower probability of successfully completing an acquisition. This is particularly true if you don’t have a prior relationship with the target. You can improve your chances of success with this approach by first developing a strong network of corporate executives and intermediaries, including lawyers, accountants, investment bankers, private equity firms, commercial banks, wealthy investors, and other capital providers. They can vouch for your credibility and connect you with better-matched targets (right geographical preferences, industry or market niches, revenue, profitability, stage, growth, etc.) that are genuinely interested in selling.
Participating in a competitive bidding process
When it’s your company that is being approached, the process is quite different. Usually, the seller has engaged a sell-side investment banker to run a confidential, managed sale. You’ll be asked to participate in a formal process to bid on a target.
The investment banker will most likely be executing a competitive auction process on behalf of the target, in which several potential strategic and financial buyers may actively bid to acquire it. This approach benefits the target by ensuring a full value sale. For your part, you can be more certain of the target’s interest and intention in selling.
The investment banker will provide you with a written executive summary of the anonymous target’s business, with key identifying elements removed. The summary, commonly referred to as a “teaser,” helps you to size up your potential acquisition. If you’re interested in going further into the process, the investment banker will submit a CA before revealing the target’s identity.
The next step will be a confidential memorandum (CM) that describes the target, its industry, and the investment merits and growth opportunities in great detail. A summary of the target’s financial statements and forecasts will also be included in the CM.
Whether you reach out to a target or pursue one in a competitive bidding process, it’s critical that your initial efforts are focused on fully vetting the company for sale. If your manufacturing or distribution business is prosperous and has a good management team, strong business model, and access to capital, you can move forward confidently in the process from this point.
How we can help
Throughout the acquisition process, it is important to work with a trusted advisor for merger and acquisition strategic guidance. CLA’s manufacturing and distribution industry professionals can work closely with our M&A team to help you carefully plan for an acquisition, make smarter decisions, and avoid mistakes. Our advisors will help you understand the potential enhancements to your company, explain the economics and financial consequences of your acquisition options, and discuss strategic, integration, regulatory, human, cultural, and other risk factors.