Acquisitions: Effective Growth Strategies for Middle-Market Businesses
by Phil Gilbert & Mike Paparella
Universal Advisor, 2007 Issue No. 1

For most middle-market companies, business growth is synonymous with internal or organic expansion. Acquisitions aren’t typically considered to be a practical growth alternative among small-to-mid-size companies. However, regardless of company size, acquiring a company, a product line, or intellectual property can be an effective way to grow a business — as long as careful planning and a disciplined approach are employed.

Why pursue an acquisition? Market share, for one. An acquisition allows a company to enter a new market by purchasing a company with a pre-established presence or to expand its presence in its existing market by acquiring a competitor. Acquisitions can also be less expensive than organic growth considering the potential costs of incremental infrastructure, learning curve mistakes, and research and development.

The acquisition process involves four general phases: 1) developing an acquisition strategy; 2) implementing the targeted search;
3) selecting target candidates; and 4) selecting the final target and consummating a deal. Each phase contains multiple steps that help determine the attractiveness of a particular acquisition candidate.

Using the knowledge gained from a growth-strategy analysis that assesses markets, products, customers, and growth goals, the company develops a concise acquisition strategy. This strategy will present a clear set of acquisition objectives to serve as the foundation for identifying and prioritizing the characteristics and attributes an acquisition candidate should possess. Once those attributes have been defined, the company can define the acquisition criteria used to search for potential candidates, such as processes, markets, management, financial considerations, and technology.

Now the company begins its target search. This phase involves identifying targets consistent with the established acquisition criteria and contacting these targets to determine interest in a possible transaction. If interested, preliminary information is obtained to assess and evaluate the candidate. It’s typical for an interested target to request the execution of a confidentiality agreement before releasing non-public information.

Based on the initial evaluation of interested targets, the company selects the candidates to pursue. Significantly more information and research will be gathered during this phase through on-site meetings with the management team and additional analysis. Valuation and strategic assessments typically occur during this phase. The result is a final evaluation of the possible targets to determine a prioritized list of companies to pursue, the rationale for each, and at what value.

Once a target has been selected, the objective shifts to consummating a deal. Full due diligence occurs covering financial, legal, and operational aspects of the business with significant interaction between management and the acquirer. Advisors and legal counsel for both sides begin the major push of negotiating and finalizing various documents, such as the purchase agreement and employment agreements. If the deal requires financing, those arrangements need to coincide with the rest of the transaction. All of these items lead up to the closing. It’s important to keep the process moving toward closing, since time lags in the process tend to increase the potential for complications.

The acquisition process is not to be taken lightly, but it can be an effective tool to grow a business. Within each of the stages there are several steps and many potential pitfalls. Navigating through the acquisition process can be challenging. It’s important to maintain a disciplined, methodical approach to ensure the acquisition is both the right fit for your company and executed successfully.