Acquisition Planning
Acquisition planning ties in directly with the strategic plan for the acquirer. Without adequate attention to the strategic planning process, the chances for executing a successful acquisition strategy diminish greatly. Acquisitions are merely an extension of the company’s existing growth strategy. Only by assessing the current capabilities of the acquirer can a determination be made whether or not value can be added via M&A, and whether prospective targets are an effective fit to achieve stated objectives.
Either the current strategic plan should be review and revised, or a plan should be established prior to pursuing acquisition transactions. If the first time management or owners seriously consider an acquisition is when approached by a potential seller (or the investment banker), then a high likelihood exists this prospective transaction is either not a good fit, or will not be integrated effectively. The goal of the seller (and intermediary) is to achieve the best sales price possible. Whether or not the seller’s company is an appropriate fit for the buyer is not their primary concern, especially in an all-cash or nearly all-cash deal.
To review the strategic planning process, consider the standard SWOT analysis:
1. Strengths
2. Weaknesses
3. Opportunities
4. Threats
Answer various important questions about how the acquiring company runs its core business: What is its basis of competition? Who are its key customers? What special relationships are in place? How does the sales process work? What are the primary distribution channels?
Most important, management must understand, document, and embrace the culture of their company before trying to determine if a prospective target is the deal to close.
With research and analysis focused in these areas, strategies are established for pursuing growth, adding products and services, reducing overhead and production costs, etc. These strategies then help point to where acquisitions might be an effective tool for reaching the stated objectives. As part of this process, acquisitions are assessed as one possible strategy for pursuing the objectives outlined in the strategic plan. Can M&A enhance the core business in a resource-effective manner (in terms of price, people, systems, culture, intangibles, etc.)?
To build or to buy? This is one of the primary questions to be addressed via the acquisition plan. Step one is to develop a general investment thesis for the different types of acquisitions that appear to make sense based on the strategic plan. This investment thesis will then be further refined for each specific deal that is explored. Developing processes and hiring people requires a commitment of resources. If entering into new geographies, it may take time to develop a profitable customer base. Similarly, if adding new products or services, the cost to create products and processes, plus marketing expense, may result in a period of operating losses. Thus, the analysis here is to compare the projected cost of investment for building internally versus acquiring an existing operation focusing on the area of interest.
For the strategic goal of increasing scale, estimates of potential expense savings from synergies in the existing operations are calculated based on possible increased size due to acquisition. Revenue enhancements are analyzed in a similar fashion. However, at this point in the process, this is a preliminary estimate of possible savings levels and revenue increases associated with a hypothetical, preferred target (or targets). This forms the basis for creating one or more target profiles.
- Ben Howatt, CPA, CVA
The Howatt Group Ltd.
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