Want to make a middle market investment banker roll their eyes? Have a call or a meeting and tell them that you are a manufacturing (add any business here) company and would like to grow through acquisition. You would really appreciate it if, when that banker sees a prospect that might be a fit for Company X's search, they let you know.
There are countless Business Development officers at companies big and small using this investment banker outreach to try to drive their acquisition strategy. On its face, the strategy makes sense. Investment bankers are selling businesses and the business development guy wants to buy businesses, so if he or she contacts enough investment bankers, something is sure to happen.
This is a really terrible strategy.
Its not that we investment bankers won't put your company on our buyer list, but the ROI of this strategy is notoriously low. We know this because we also work on the buy-side for clients.
When we work on the buy-side, the first thing we tell potential clients is "if you are going to go out there and aggressively drive growth through acquisition, you better be willing to take a proactive approach." To grow through acquisitions, you cannot wait for companies to fall in your lap, you must go out there and get them.
If a potential client is still with us at the table after that speech, here's how we describe a good acquisition process:
1) If your company doesn't already have a strategic growth plan, make one.
Growing for growth's sake really doesn't make sense for you or for the potential target. Instead, think about products that might be interesting to acquire, geographies that might be important, technology that could be transformational, or capacity that might enhance operations.
Figure out what you need because then we can look for it.
2) Look at the universe of potential targets.
Now that we've figured out what you want, let's see how many of those exist out in the world. Acquisition searches are very difficult because in general, you need to reach out to about 20 companies before you get one that will even begin to have a conversation with you.
So, if we look at the market and we see that there are only 5 companies that have what you identified as a need in your strategic plan, then the search is going to be difficult (and you might want to think about building this capability versus buying it). However, if there are 200 companies that fit the bill, an acquisition strategy makes much more sense.
3) How to Find your Targets.
Since we have established that you can't wait for companies to find you, you will need to find the companies that match your requirements. There are plenty of ways to do this but the most fertile areas tend to be:
* Industry associations - many of them put a list of member and their websites right online.
* Industry conferences - Some of them put a list of attendees or past attendees online, but if not, sign up for the conference and attend. It might feel awkward, but walking around from booth to booth and telling people what you want, is a great way to get leads and better yet, ideas! People are amazing resources when they realize you aren't trying to sell them something.
* Databases - These can be useful if you realize that the information on companies isn't always reliable and should be double checked. SIC code searches, Manta and some paid databases can be good search tools.
* Internet - This is probably my least favorite way to find targets, but it can be useful as a way to verify information you have already received or to learn more about a company that you like.
Don't skimp on the making a list part. It takes a long time. It is also important to realize that the list is a living document and things will get added and fall off as your process continues,
People start to get nervous at this part. It is important to remember that you are offering the target something. Try to make it a "sale of an opportunity," not a cold call about selling your business.
An important thing to remember here is that you have a tremendous amount of competition. There are thousands of private equity firms cold calling business owners every day, so you need to differentiate yourself.
Don't even think about sending a letter. These don't work.
An email is OK but a phone call is best. When you get someone on the phone, draw from your strategic plan. Tell them why they ended up on your list and what problem they solve for your company. Tell them why you think they would be valuable within your organization. Potential acquisitions respond best when they see your vision and how they might fit within your organization.
If you get them talking, immediately schedule a lunch or an in person meeting if you can. People will share a lot more about themselves and their company when you are sitting face to face.
5) Continually adjust.
As you go through this process, you will inevitably find that the target areas you once found very intriguing, are not as interesting as you once thought. That's OK. Remember, your list is an ever-evolving document and an acquisition process takes time.
6) Think about hiring some professional help.
Does all this sound like a lot of work? It is. Many investment banks are very careful about the buy-side clients they take on because the amount of work necessary to complete any strategic acquisition program is substantial. If you choose to work with a banker (highly recommended), bring your strategic plan with you so you can describe your vision to the banker.
Buy-side fees are different than sell-side fees. A normal buy-side engagement includes a monthly retainer and then a success fee that is due once a transaction happens. This might seem expensive, but its definitely cheaper than having your own business development department.
Growth through acquisition can be a great way to supercharge the development of your company, but don't be passive about it. If you decide to go down the acquisition path, make sure you are being active and thoughtful about it. Figure out what you need and go get it.