Accelerating Growth and Value Through Acquisition

by Joel Strom

Accelerating a company’s growth through acquisition is a frequent topic in a growth advisory practice. In the past, I’ve shared tips on how to assess growth strategy for a company; then, if it was the right way to proceed, the actions necessary to ensure that the acquisition was successful and achieved management’s goals. Then we entered a new reality. Something called “Business in the COVID-19 Era.” Preparing a presentation for a refresh on growing through acquisition in May, we still had no real idea how bad this situation would get and how it would affect all of our businesses. So, we pivot and address the times we are in. It’s how businesses survive. We are right in the heart of the crisis and now we have no idea what the economy will look like when we come out of this on the other side.

A safe assumption is that no matter what the recovery looks like, acquisitions will continue to be an important component of many businesses’ growth strategy in 2021 and beyond. In fact, there may be more businesses on the market than we have ever seen in the history of the U.S. economy. Who wins? Are you poised to take advantage of such a market, as an acquirer or acquired business?

A truth that will likely remain consistent is that companies typically consider making an acquisition for a limited number of reasons such as accelerating company growth beyond what they can realize organically or perhaps to gain a competitive advantage, in good times and in bad.

Another constant will be that some of these acquisitions will meet or exceed expectations while others will result in total disasters. There will continue to be some proven steps to ensuring a successful acquisition. These steps can help evaluate the company’s readiness for an acquisition, determine what needs to be done to prepare for an acquisition, and finally develop a successful acquisition strategy.

Specific to the current situation, there may be some opportunities for certain acquirers that did not exist prior to the crisis. There may be situations that arise during or after the crisis where a company desperately needs cash, more distribution, or just some new ideas ,and a sale could provide new life for the troubled company; a win for both sides of the acquisition. Also, like in the aftermath of other downturns, there will likely be additional acquisition opportunities as some owners who, after struggling through this, are just tired of the fight and will feel that it is time to sell their businesses and eliminate their anxiety and risk.

As tempting as it might be, before simply jumping into the search for an acquisition target, stakeholders need to take one step back and thoroughly understand why they are considering an acquisition. In other words, they need to develop an acquisition strategy. If they are not clear on the reason for

the acquisition, there is little chance of finding the right target. How well the strategy is defined, will have a lasting impact on the success of the entire process. However, even with a defined strategy, it is crucial to stay focused on candidates that meet that criteria as the search progresses. For example, if the strategy is to gain efficiencies of scale then a candidate that would instead provide vertical integration would be eliminated, no mater how interesting the company. Other common strategies for an acquisition include market diversification, talent, capacity, speed to market, IP and reducing competition. Once the acquisition strategy has been defined, there is still one more step before going out looking for the perfect match to that strategy. The goal of this step is to realistically assess the company’s ability and resources to handle an acquisition and then decide what type of acquisition would best fit that ability. This assessment is not related to the monetary investment required to make the acquisition; this is about the organization, the systems and the management team and their ability to find, check out and absorb an acquisition without damaging its core business. Acquisitions are exciting — sometimes so exciting that people who should be minding the core business get distracted and lose focus on dayto-day operations. An assessment of As tempting as it might be, before simply jumping into the search for an acquisition target, stakeholders need to take one step back and thoroughly understand why they are considering an acquisition.

the organization’s ability to absorb an acquisition should help guide its choice of candidates. It may be determined that the only viable acquisition would be one that can be left operating independently (at least for a while) from the core business due to system, structure or cultural reasons. This assessment of the organization’s capabilities and capacity for an acquisition is even more important if the company is considering a business weakened by the crisis. A business like that could take some special attention and nurturing in order to grow again. Once it has been decided to go forward with an acquisition attempt, there may be some targets that are known to be a good match for the strategy. Management can make a list of those, though it is recommended that they do not move forward just yet. From this point on in the process, long-term success “without regrets” depends on doing things right, dotting i’s and crossing t’s. This is where putting together the right outside advisory team may become a necessity; from hiring the right investment banker and M&A professionals to help identify and vet potential acquisition candidates, to attorneys and CPAs who are M&A specialists to again make sure everything is done right, to consultants and advisors experienced in acquisition and cultural integration. Most business owners and management teams have years of experience operating and grow

ing their businesses; however, they may only acquire one company in their entire career. An acquisition is too important to not have professionals help with the specific issues involved in the process.

There are two more keys to a successful acquisition process that need to be mentioned here, because if not heeded, they can often cause major long-term headaches. The first would be management deciding to go forward with an acquisition while ignoring many “red flags,” including the advice of their advisors that it is not the right choice. An acquisition is exceedingly difficult and often impossible to reverse, so taking in all factors and information from a thorough due diligence process is critical to making the right decision.

Finally, once it is decided to move forward with the right acquisition, the team’s work is nowhere close to being done. Before signing those final papers, a post-acquisition transition plan needs to be developed because studies show that more mergers and acquisitions fail due to integration issues than financial ones. Of those that do fail during integration, 70-90% of them are due to lack of attention to human capital and cultural fit.

Whenever we come out of this crisis, and hopefully it will be soon, whatever the new normal is in the post COVID-19 era, acquisitions will be an important option for accelerating growth and enterprise value. l

Joel Strom is a founding partner and head of the Value Creation Consulting Practice of CKS Advisors. He brings more than four decades of executive business management and strategic consulting experience to help his clients achieve substantive results in value creation, family business management and succession, strategic planning, and organizational restructuring. He developed the firm’s exclusive Strategic Value Acceleration Process that provides clients a means to maximize their company’s sustainable strategic enterprise value. Joel can be reached at jstrom@cksadvisors.com or (602) 377-1383.

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Oct. 30, 2020

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July/August 2020 Issue of AZ CPA*

m m m The Payroll Tax Holiday Free Airline Tickets Unrelated Business Tax

7. What occupation or profession is experiencing the highest rate of suicide deaths? m Dental Services m CPAs m Construction and Extraction

8. EAP stands for: m Equal Amendment Policy m Employee Assistance Program m Employee Activity Program

9. Of the mergers and aquisitions that fail during integration, 70-90% of them are due to: m Monetary and Funding

Problems m Unforseen Legal Issues m Lack of Attention to Human

Capital and Cultural Fit

1. In this month’s Chair’s message, Ginny De Santo talks about: m COVID “Fever” m Zoom Meetings m The Annual Meeting

2. What did the ASCPA Board of Directors do at its last meeting?

m Approved the 2020/21 Budget m Moved the Office m Sent a Letter to the Governor

3.

What buzz word recently appeared during COVID-19?

m Career Pivoting m Virtual Harassment m Covidity

4.

The Leadership & Growth Alliance program is for people who:

m Want to learn how to be a mentor m Are in the first 10 years of their career m Want to gain weight 5. The CARES Act created the Paycheck Protection Program (PPP), which offers a forgivable loan that organizations with 500 or fewer employees can use to help with payroll costs. m True m False

6. Once a PPP loan is forgiven, other provisional relief under the CARES Act is no longer available, such as: 10. According to author Joel Strom, will COVID-19 offer more or less opportunities for mergers/ acquisitions? m More m Less

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