With business sellers expectations more moderate today than at any time over the last 6 years, Game Plans for Growth is running a series of 3 newsletters on ‘How to be a canny business Buyer?’ This first newsletter focuses on the strategic advantages of synergistic gains.
Where can you invest your businesses cash for a better return? The banks are still offering only minimal returns so why not consider investing in your business? Investing could take the form of equipment, people or even a targeted acquisition. Acquisitions could be attractive as the price sought by medium sized company sellers has declined from 13 times EBITDA to 9 times (source BDO Private Company Price Index), with smaller companies typically further discounted from these multiples. So how can you make a synergistic acquisition?
Setting the scene – According to conventional business growth models (such as the Ansoff matrix), business growth through one new variable tends to involve less risk than when several variables are new. Here you can find a method to assess your business growth risks. Therefore if your business launches a new product to existing customers this will be lower risk than if you launching a new product into a new market.
However strategic growth can also be achieved through acquiring a business, particularly when that business has similar products and customers to your core business.
Take an example of a business which has its Core business with established products and customers, for this purpose labelled Core Customers and Core Products, then it might look at a possible acquisition of ‘Target’ which had similar Products in an adjacent market, say Target Products and Target Customers.
Following a successful deal, the enlarged business can then seek to cross sell Core Products to the Targets Customers (bottom right box) and also to sell the Targets Products to Core Customers (top left box).
When done well this gives a potential quadrupling of Sales and can significantly accelerate business growth.
This can be shown diagrammatically:
The End Result
Clearly it is crucial to evaluate the strategic fit of the potential target. In addition it is best to review the business from a commercial and financial angle (see our newsletter on Due Diligence and why it matters).
In addition as part time FDs we are often asked to do a ‘commercial review‘ of a target business – firstly assessing their balance sheet and secondly generating a forecast for the target which is often different to the sellers own forecast. This is then normally used to help negotiate the target business valuation.
Why not talk to us about your business strategy and how we can reduce your business risks? If you would like to discuss any matter raised in this newsletter then please do contact us.