As you might expect, I deal with buyers on a daily basis, each enquiring about current opportunities or sharing their specific requirements in the event that something appropriate comes up. In virtually every situation, the buyer appears to have a clear rationale for pursuing an acquisition, but when sitting on the sell-side I often don’t dig too deep into the why, taking the request at face value.
However, while sitting with a Family Business client recently, the very subject of making acquisitions arose, and the need for a strong why became all important. Initially, the client’s sons – both of whom are involved in the business – had convinced Dad not to sell against my recommendation, but to hang on to the business and continue growing. In an industry facing considerable headwinds, remaining involved for the medium-term carries with it far more inherent risk than selling at what is most likely the best possible time, but more on that at a later date.
What was more telling was the answer I received when asking the question, “why grow?”.
Stunned silence.
Simply put, there wasn’t a longer-term plan. One suggestion that came out later in the discussion was “survival”, but if a business is contemplating that as the underlying why, then the stakeholders may want to take that as a sign to consider selling out immediately.
Most buyers have a clear endgame in mind when pursuing acquisitions, most commonly:
- Buying a job or a lifestyle – investing in a small business that requires owner involvement to achieve a return on capital employed that might otherwise sit idle in the Bank;
- Filling strategic gaps in a company’s service lines, geographic footprint or market penetration;
- Building scale towards a trade sale or IPO at a higher multiplier and building wealth on the arbitrage between the buy price and the final sell price;
- Achieving revenue targets to fulfil the expectations of shareholders and the public market.
Each of these is a clear, defensible and motivating why for making an acquisition.
Buying for the sake of buying is a potentially fatal pursuit, in the context of an organisation’s longer-term sustainability. Acquisitions and their subsequent integration are costly, complex, time-consuming and problematic, diverting capital and management attention away from the existing business. As I pointed out in the recent discussion, if my client was to make an interstate acquisition as they were suggesting, that would mean that at least one of the two sons would likely have to relocate for a period of time to oversee and integrate the acquired business. And in that case, who would do their existing job? As it was pointed out: if you’re not here, you’re not here.
The upshot is, of course, that making acquisitions must be based on an underlying strategy. The acquirer must know specifically what they want to buy, why, how they will value targets, how they will pay for them and what level of ROI they expect and over what period. The strategy should incorporate an integration plan, including the deployment of internal resources, and contingencies for the elements that will invariably go wrong. And all before speaking to any potential targets.
Any failure to put discipline and rigour around acquisition intentions is likely to result in trouble, to the extent that the very existence of the buying entity is put into jeopardy. Precious time, capital and resources deployed on the wrong acquisitions is a major distraction to core business, as many now wiser acquirers can profess. What started out with the best intentions of creating value can very quickly destroy value.
So before you buy, make sure you have a strong why.