Acquisition Strategy

While most of the news has been focused on Amazon’s acquisition of grocery chain Whole Foods, last week, Walmart also executed a deal. The big box retailer known for its low prices will acquire men’s fashion retailer Bonobos for $310 million as part of its strategy to build an apparel business to compete with Amazon. Bonobos is a high-end men’s retailer offering slim-fitting suits, shirts jackets and suits. Founded in 2007, Bonobos has a few retail locations, but sells mainly online to young, urban customers. Walmart has also acquired a number of online retailers including Modcloth, Moosejaw, Shoebuy.com, Hayneedle, and of course, Jet.com.

It’s no surprise that Walmart is using acquisitions to compete with Amazon by ramping up online sales and attempting to compete in fashion, but the real question is can Walmart be successful?

Facing a Branding Challenge

Branching out to fashion is not new to Walmart. In 2009, the big box retailer moved its apparel office to New York and participated in New York’s fashion week as part of a strategy to offer trendier, higher quality clothing. This endeavor failed, and after two years Walmart moved back to Arkansas.

Maybe it’s just me, but when I think about fashion, Walmart is not the first brand that comes to mind. When I want to buy trendy, clothes without breaking the bank I think of brands like Target, TJMaxx and Marshalls, Ross, H&M, Forever 21, or Nordstrom Rack. In fact, I would never think of Walmart and fashion together.

Your brand is a powerful tool for connecting with your customers, and developing brand equity is no easy task. Good brands share a consistent message, building up value in people’s minds over time so that when a consumer looks at your brand they know exactly what to expect.

Getting branding right is a challenge in any acquisition because it is the outward facing aspect of your company’s culture. After an acquisition, you have several options. You can erase the seller’s brand and bring it under your own, maintain the existing brand in parallel with your own as a sub brand, discard both brands and create a new one, or leave the seller’s brand alone. If you are acquiring a company because of its strong brand name, it’s best to leave the brand alone. If you try combining the brand into your own, you may destroy the very reason for your acquisition.

With this in mind, it’s obvious why Walmart failed when it tried launching House of Walmart back in 2009. High-end fashion and Walmart just don’t mix. This time around it seems like Walmart has learned from is past mistakes and realized it can’t build a trendy clothing line using its own brand. Instead, Walmart is acquiring multiple apparel brands, and it hopes the customers will remain loyal to them and continue purchasing their apparel.

Banking on Customer Loyalty

Although acquisition helps Walmart enter the apparel industry much quicker, a challenging road lies ahead. Bonobos and Modcloth and are probably the most well-known of Walmart’s recently acquired brands and have loyal customers, most of whom were not happy with these deals and vented their frustrations online. Merging Walmart is a hard pill to swallow for many loyal customers are afraid that Walmart will kill their favorite brand’s unique culture. If the customers leave these brands because of the deals, it may be the end of Walmart’s fashion foray.

But, given time, and if handled correctly, the acquisition may still work. Customers are a fickle bunch, and the initial shock and discontent may quiet down if Walmart maintains separate brands for Bonobos and Modcloth and continues to operate their websites. From a branding perspective, it would have been best if Walmart kept the acquisitions completely secret, but this is impossible as Walmart is a publicly traded company. When a strong brand is a driver for acquiring, the buyer must make sure it does not ruin the brand’s value after closing. Getting branding right will be key to Walmart’s success or failure in the fashion world.

Photo Credit: Mike Mozart via Flickr cc

Faced with slow sales, the Nordstrom family is exploring taking the iconic department store private. It’s no secret that despite the strong economy, the retail industry has been hit hard and the rise of ecommerce has impacted brick and mortar stores across the world. Department stores like Nordstrom, Macy’s, JCPenney, and Sears are struggling to adapt to a changing retail environment and new online competitors like Amazon.

While normally not viewed this way, privatization is a type of acquisition where the Nordstrom family, along with key shareholders, would acquire the department to strategically reposition the company. Here are three reasons why going private might help Nordstrom grow in today’s tough market.

  1. Shed Cost – Nordstrom will be able to shed some of the costs associated with being publicly traded. While not the primary driver for going private, this is certainly an advantage for a company looking to increase the bottom line.
  2. Focus on the long-term – Publicly traded companies must manage the expectations of the stock market and file quarterly reports. On the other hand, private companies can pursue strategies that may have a longer pay off period, without answering to anxious investors. Nordstrom will likely have to make some drastic changes including restructuring, which may impact revenue in the short-term in order to reposition the business for long-term success.
  3. Stealth – Why should Nordstrom share its strategy with a competitor like Macy’s? As a private company, Nordstrom will be able to maintain a level of stealth in a marketplace that is becoming increasingly competitive. Secrecy will be advantageous as retailers compete in the shrinking market of brick and mortar stores and try to expand in ecommerce.

Going private may help Nordstrom grow in a changing retail landscape, but it may not be enough to ward off powerful market forces. One thing is certain: retailers can’t keep going about business as usual and expect to survive in the future. In any industry, successful companies are those that proactively adapt and anticipate changes in future demand.

Photo Credit: Mike Mozart via Flickr cc

Done right, acquisitions create value and accelerate a company’s growth setting you up for long-term success. However, experience tells us about 77% of acquisitions fail. Deals often fall apart before they close or fail to generate their expected value. Here are three common reasons why acquisitions don’t work out and how you can avoid them.

1. Focusing on Financials

Acquisitions that are based purely on financial engineering rarely generate lasting value. Cost cutting will certainly help top-line growth, but you can only cut costs once. In the long term how will you grow revenue once you’ve cut costs? While many acquisitions do result in cost synergies from combining back office operations, this is should not be your primary reason for acquisition. Successful acquisitions are based on strategy rather than cost-cutting.

Another common mistake price-conscious acquirers make is to search only for cheaply priced companies. Often these companies are in distress, but because of the low price, the acquirer might be willing to overlook other critical issues such as liabilities or cultural issues that could affect the deal’s long-term success. While acquiring a healthy company today might seem more expensive, the chance for long-term success tends to be greater.

Solution: Strategy First

Instead of focusing on costs, smart acquirers focus on strategy first and all other factors second. Without a strong strategic rationale, you risk slipping into the 77% of failed acquisitions. Acquiring the wrong company is an expensive mistake and you would be better off if you had never done the deal in the first place.

2. Lack of Strategic Rationale

Acquirers who make this mistake tend to fall into one of two camps. Either they have no reason for acquisition or they have too many. With no reason for acquisition, you risk buying whatever opportunity happens to come along simply for the sake of acquisition and with too many reasons, you risk diluting your efforts. In both cases, without a single clear purpose guiding your acquisition, you risk acquiring a company that does not advance your growth strategy in a meaningful way.

Solution: Have ONE reason for acquisition

For each acquisition you pursue, you should only try to fulfill ONE strategic need. Trying to meet multiple needs means you may end up meeting none of them. Think about how you hire employees: if you have various positions in sales, accounting, and operations, you would hire three different people. In the same way, if you have multiple strategic needs, you should pursue three different acquisitions instead of lumping them into one deal.  For achieving a profitable result, be sure to select only one reason for acquiring a company.

3. Integration Challenges

Integration is incredibly tricky to master and there are many moving pieces to consider from operations to employees to branding to suppliers to customers. There is no one fool-proof way to seamlessly merge two entities into one and even the best integration plan will have a few hiccups.

Solution: Plan Early

Overcome this obstacle by planning for integration early in the M&A process so you can anticipate challenges, develop solutions and establish a plan for moving forward. Far too often companies think of integration as an afterthought, but the reality is if you are planning for integration on Day One after the transaction closes you are already too late. On Day One, you should already have developed an integration plan and begin putting it into action. Addressing integration early on gives you plenty of time to identify problems and opportunities, develop solutions, and create your 100 day plan. The first 100 days after closing are a critical time and you must move swiftly to implement your plan in order to be successful.

While this is by no means an exhaustive list, addressing these key issues can be the difference between success or failure when it comes to growing your business through strategic acquisitions. Make sure to learn from the mistakes of others.

Photo Credit: Roman Drits Barn Images

Do you want to grow your business? Of course you do. After all, growth is the key to a successful company and, without it, a business is almost certainly declining. The real question isn’t if you want to grow your business, but how you will go about doing so.

The natural trajectory of a new company is a period of accelerated growth that plateaus once the business matures. Continued growth throughout the life of a business is critical to long-term success but can be difficult to sustain for mature companies.

Especially in the middle market, where we often lack the resources of large multi-national firms and don’t have the flexibility to adapt like lean startups, finding a new way to grow can be difficult.

So how do you grow your company? Whenever I speak to executives, I have them explore their “5 Options for Growth,” a simple, yet powerful tool that helps generate new ideas, organize your thoughts, and create a framework for moving forward.

Your five options for growth include:

  1. Organic – This is the option you are probably most familiar with; it is growing by adding more customers or selling more products. Simply put: it’s business as usual. There are some creative ways to employ organic growth, such as developing a new product for existing customers or creating a certification class for using your products. Chances are you are probably already doing some of this organic growth, but there are also ways to think outside the box and innovative ways of jumpstarting organic growth. Think about any adjacent markets you could serve or strange new options.
  2. Minimize costs – While not a strategy for long-term growth, minimizing costs can help improve your bottom line. You may instead have state-of-the-art operations and technology that allow you to improve efficiencies and increase margins while selling your product at market price.
  3. Do nothing – Sometimes staying the course is the right option for a company, but more often than not, leaders drift into “doing nothing” by accident. No matter how healthy your company is today, you must continually evaluate your current business strategy to ensure your future success. Never continue a strategy simply because that’s the way it’s always been done. Smart leaders understand the need to take a second look at their current strategy and readjust as needed.
  4. Exit – Most people don’t think about exiting when it comes to growth, but this should be considered. Especially if you’ve hit a plateau or the current market is in decline, it might be time to think about cutting your losses so that other business lines can succeed. Think about how crazy it would be for IBM to continue producing typewriters in today’s digital age of computers and smartphones. Sometimes you have to shrink before you can grow.
  5. External – External growth involves engaging with companies outside your own. There are nine pathways of external growth including strategic alliance, joint venture, licensing, toll manufacturing, green-fielding, franchising, import/export, minority investment, and acquisition. The advantage of external growth is that it allows you to rapidly grow your business when you’ve reached the limits of organic growth or want to expand outside your current trajectory. Some shy away from this option because they think it’s only for large corporations, but the truth is any company, regardless of size, can benefit from external growth.

Now that you know what the five options for growth are, I encourage you to brainstorm how each option might apply to your company. One of the most powerful thing about this tool is that it help you realize there are a number of possibilities for growing your business, place each option in context so you can fully understand it, and be confident in selecting the best path for growing your company.

Learn more

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Multi-million and billion dollar deals dominate the news, and sometimes it can be difficult to see how these transactions apply to your company. But if you look past the zeroes and dig down into the “why” of an acquisition, you’ll find there are many lessons for middle market executives looking to grow their companies through strategic M&A.

Most acquisitions center on one of the following common reasons to buy:

  1. Increase top-line revenue
  2. Expand in a declining market
  3. Reverse slippage in market share
  4. Follow your customers
  5. Leverage technology
  6. Consolidate
  7. Stabilize financials
  8. Expand customer base
  9. Add talent
  10. Get defensive

Let’s take a look at a recent example from earlier this month. Coach announced it would acquire Kate Spade for $2.4 billion. Declining traffic to department stores, likely driven by the rise of ecommerce, means Coach and Kate Spade need to find new ways to generate revenue. Both companies have been hit by weak sales. The acquisition is not just about financial engineering and cost savings that will result from combining operations, but about accessing a powerful brand name and new, millennial customers, which Coach views as a growing market. About 60% of Kate Spade’s customers are millennials.

Building a recognized brand name takes a significant amount of time and effort, and gaining customer loyalty is even more difficult. Through acquisition, Coach can rapidly expand its footprint in the millennial market. While you might not be in fashion, consider how you might access your desired customer base. Can you reach these customers through organic means, or will acquisition prove to be more effective?

Keeping an eye on big mergers can help you think of fresh ideas for growth, regardless of the size of your company. I encourage you to use the list of 10 common reasons to buy as a framework for analyzing the underlying strategy of deals so that you can develop new strategies for growth.

Photo credit nakashi via Flickr cc

Negotiating for an acquisition is quite a bit different than any other type of negotiation. Unlike a debate or argument, where your goal is to soundly best the opposite side no matter the cost, in acquisition, you must achieve your goal while maintaining a positive relationship with the opposite side. This is because you’ll likely be working alongside the opposite party once the deal closes.

Especially in the case of strategic, not-for-sale acquisitions, the buyer will often keep the owner on at least for another one to two years – maybe even longer – to continue growing the business. If both sides hate each other, it’s unlikely the deal will work out in the long-term. You don’t want to have a strained relationship with the seller who may be integral to the newly merged company’s success. So how do you get what you want without souring a relationship?

Pick Your Battles Wisely

One of the tricks is to realize that not every issue is created equally, and it’s not necessary to argue over every last detail. Before you begin negotiating, you should understand your desired outcome and establish which items are essential and which ones you are willing to be flexible on. This way you compromise on certain issues and save your battles for the nonnegotiable items.

An Open Dialogue

A policy of openness and honesty is always helpful for fostering a relationship. While you may be tempted to storm off to “send a message” when discussions get heated, this rarely furthers discussion and only helps to create a discontent situation. Instead, try asking questions when you don’t agree or understand the seller’s perspective.

Hard-nosed negotiation tactics rarely work well in not-for-sale acquisitions. We’re not suggesting that you compromise your position by any means, but it’s important to think about the big picture and pick your battles wisely. Experienced strategic acquirers know negotiations are about more than beating the seller into submission. After all, the goal of acquisition is not to “win” the negotiation, but to put together a successful deal.

Learn more about negotiation for M&A in our upcoming webinar “Successful Negotiation Tactics” on Thursday, June 8, 2017.

After completing this webinar, you will be able to:

  • Explain the steps in building a negotiation platform
  • Describe effective tactics for getting what you want in a deal while protecting the relationship with the prospect
  • Detail how and when to bring legal counsel to the negotiating table
  • Outline a strategy to stake out three important details of any acquisition: Terms, Timing and Talent
  • Develop methods for broaching the issue of price and avoiding negotiation in circles

Successful Negotiation Tactics

Date: Thursday, June 8, 2017

Time: 1:00 PM – 2:00 PM EST

CPE credit is available.

Photo Credit: U.S. Department of Agriculture via Flickr, Public Domain, Modified by Capstone

 

Verizon will acquire Straight Path Communications for $3.1 billion, beating out AT&T’s initial offer of $1.25 billion. The primary driver for the deal is accessing Straight Path’s millimeter wave spectrum which will be key to building a faster 5G network.

Disruptive technology and evolving consumer habits are reshaping the telecommunications industry at a rapid pace and both Verizon and AT&T have used acquisitions to stay ahead of the curve. AT&T recently acquired Time Warner for $85 billion to gain access to its content including HBO and CNN and Verizon acquired Yahoo! for $4.83 billion to boost its digital ad business.

Consumers are dropping landlines and cable TV and moving toward online streaming, especially on mobile devices. Social media has also reshaped where viewers get information and entertainment and media companies are struggling to adapt. For Verizon, using acquisition in along with organic growth, will help the company build an infrastructure to stay relevant with consumers. A 5G network will have higher speeds and greater capacity to keep up with downloads, video streaming, and other smart devices like Alexa, Google Home, or even automated vehicles. Companies that can anticipate and capture future consumer demand will remain successful and continue to grow, while others will be left behind.

Leaders in all industries should be aware of this dynamic and consider capturing future customer demand as a major driver for strategic growth. This means giving customers what they need and also what they don’t know they need. Amazon does an excellent job of this by suggesting items in their follow up emails base on strong algorithms. Think about how you can apply this principle to your current customers and your potential future customers and how you will go about fulfilling their needs.

Photo Credit: Mike Mozart via Flickr cc

Due diligence is more than just hammering away at a company to find out everything that might be wrong with it. It is about taking a focused approach throughout the acquisition process to uncover key points that will help you methodically evaluate a company to make sure it is the right fit.

Traditionally, due diligence takes place fairly late in the acquisition process, and is focused on rooting out the weaknesses of the target company. You are looking to uncover liabilities and understand the risk that comes with them. This kind of cautionary analysis is certainly an important milestone, and it can allow you to renegotiate the terms of the deal based on your findings. Due diligence in the traditional sense has also been a way to give yourself cover if problems that may arise later.

However, due diligence at its best means far more than just ferreting out hidden liabilities. If you follow recent thinking in M&A, due diligence is equally important as a tool to uncover concealed opportunities.  When you adopt this new perspective, you won’t be waiting until late in the acquisition process: you’ll be conducting due diligence right from the start. This new approach will help ensure thorough due diligence is conducted in order to maximize the success of your acquisition.

Learn more in our webinar A New Thinking on Due Diligence.

After this webinar you will be able to:

  • Describe how to organize due diligence to maximize efficiency and get the information you need to move the deal forward
  • Define what items to look for by key functional areas (sales, marketing, HR, IT, etc.), including financial due diligence
  • Explain how items uncovered during due diligence can affect deal structure and terms
  • Utilize tools to organize due diligence findings

A New Thinking on Due Diligence

Date: Tuesday, May 16, 2017

Time: 1:00 PM – 2:00 PM EST

CPE credit is available.

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Price is often the number one focus in mergers and acquisitions and everyone is eager to get down to the numbers.

However, as you might expect, buyers and sellers have very different expectations on price, which can lead to friction between the two parties. On the one hand, most sellers plan to offer their business to the highest bidder while buyers are looking for a cheap deal. Given the opposite viewpoints, it can be difficult to broach the issue of price and come to an agreement.

The best way to bridge this gap is to make sure you don’t focus on price as a primary driver for the acquisition. Before you even begin talking about dollars and cents, you should make sure the deal makes sense. Initially you should communicate the strategic value of why an acquisition between your two companies makes sense. This is a critical step, especially when approaching owners of not-for-sale companies. Aligning your vision with the owner’s vision prior to even discussion the details of a potential deal (such as price or deal structure) is paramount.

Once you’ve achieved strategic alignment and you begin negotiations, you must think about what you can offer an owner in addition to price that will convince him or her to sell to you. Money is a strong motivator, but it’s not the only motivator. As a buyer, you must identify the nonfinancial factors in addition to price that will motivate an owner to sell. Understanding the owner’s psychology is key to building a mutually beneficial deal.

Owners do sell their businesses for many reasons other than high price including:

  • Age – They may want to retire and are burned out
  • Family – They may have no heir to take over the business or their spouse may be nagging them to retire
  • Insecurity and risk – Selling now while the business is performing well may mitigate their risk
  • Excitement – They simply are excited to be considered for acquisition, because of the prestige or a possible financial windfall

Achieving strategic alignment before discussing price as well as identifying the issues that matter the most to the owner can help you bridge the gap between your number and theirs. When you approach owners with a complete understanding of all the different factors that are important to them – age, community, family, financial, and risk – you increase your chances of building a successful acquisition.

Credit unions and CUSOs are using their investing powers to be more innovative and entrepreneurial when it comes to technology and new products and services. Many are exploring co-investing with individuals and business founders who are looking for additional capital from credit unions. While these partnerships between credit union investors and individuals generate fresh new ideas, they sometimes face friction as the two cultures collide.

I had the opportunity to speak on this issue with Kirk Drake, CEO of Ongoing Operations and Brian Lauer, Partner at Messick, Lauer & Smith in the panel “Entrepreneurs as Co-Owners of CUSOs – Managing Different Business Styles and Expectationsat the 2017 NACUSO Network Conference in Orlando, Florida.

In a packed breakout session we discussed how credit unions and CUSOs should persuade individuals to work for their organization and how to build a bridge between two different perspectives. One of the most important things credit unions and CUSOs must do is recognize the asymmetry between a highly-regulated credit union environment and a swift, entrepreneurial culture. Recognizing these differences is the first step to understanding how to incentivize entrepreneurs not just from a financial standpoint, but from an emotional and strategic position so that you can grow your organization as a team.

Many are convinced that the buyer with the most money always wins the deal. Although many acquisitions by financial acquirers and strategic buyers are driven by the desire to grow revenue and the company’s bottom line, it is possible to win an acquisition without offering the most amount of money.

A successful acquisition is about finding the right equation for the seller, which includes, of course, financial compensation, as well as many other non-financial aspects including prestige, value, excitement, or strategic fit.

It can be difficult to visualize this concept, so let’s take a look at a recent example from the news. Amazon announced it would acquire Souq.com a Dubai-based internet retailer. While terms of the deal were not disclosed, Amazon reportedly paid between $650-750 million, beating out a competing offer for $800 million from Emaar Mall. So why would Souq sell to Amazon for a lower price?

From Amazon’s perspective, this deal makes a lot of sense because it will allow Amazon to enter into the Middle East while circumventing regulatory hurdles, the headache of building new infrastructure, and the cost of raising brand awareness. Souq.com is already a very popular in the Middle East where e-commerce is expanding among a growing young, tech-savvy population. Kuwait, Saudi Arabia and the UAE are the top markets for mobile penetration. In addition, Middle Easterners are willing to pay a 50-100% premium for Western products and brands from the US. The Souq acquisition will help with top-line and bottom-line growth.

So what’s in in for Souq? Why agree to a deal for less money?  The answer is Amazon’s experience and reputation. As one of the top global companies, Amazon has a large network, resources, and deep experience with e-commerce. Souq can leverage Amazon’s experience to continue growing.

It is also exciting to be acquired by a well-recognized brand and be a part of Amazon’s team. While we can’t know what the founder of Souq, Ronaldo Mouchawar, was thinking, we can safely assume emotion had some factor in the decision-making. Don’t completely forget about the human factor and emotions when it comes to M&A, especially when dealing with owners and privately-held businesses. In fact, understanding the owners motivations – excitement, family-members in the business, community pride, desire to leave a lasting legacy, risk aversion, or financial – is key to developing the right equation to persuade him or her to sell.

Photo Credit: Mike Mozart via Flickr cc

Think you can only acquire a for-sale company? Think again. Although it may seem impossible to buy a “not-for-sale” company, a company that is “not-for-sale” simply means it is not actively thinking about selling. However if the owner receives a compelling offer, they might change their mind. Here are four reasons why a not-for-sale acquisition can be better than a for-sale opportunity.

  1. Be proactive: Rather than reacting to whatever deals happen to come your way, you approach the prospects that offer the best fit with your company. This puts you in a better position for finding quality prospects that are aligned with your company.
  2. Maintain stealth in the marketplace: You can keep your acquisition search hidden from competitors. You also will gain access to acquisitions none of your competitors are aware of because the prospects you are looking at are not advertised. Another bonus: you can avoid auctions, which often drive up price,
  3. Maximize your options: If you only pursue for-sale acquisitions, you are ignoring a large number of profitable, viable acquisition prospects.
  4. Pick Winners: Companies that are not for sale are usually in good shape. Management teams are actively engaged in a successful business and are not looking for an exit. They may be happy to stay on (if you want them to) once the acquisition is complete.

As you begin your search for acquisition prospects, I encourage you to consider “not-for-sale” companies in addition to for-sale opportunities in order to increase your chances for a successful acquisition.

*A version of this post was originally published on AMA Playbook.

“We’ll know it when we see it,” many leaders say when asked to define their ideal acquisition. Unfortunately, this approach is a recipe for disaster. How will you know if it is the right company for acquisition based solely on your gut instinct? This is not how we, as business leaders, approach other decisions so why do so many approach M&A this way?

Think about it: You don’t hire whoever happens to knock on your front door asking for a position. Instead, you write a job description based on your company’s needs and measure potential candidates against the description. If you are looking for a sales person, you wouldn’t hire a finance expert instead, no matter how qualified they were.

If you search for acquisition candidates with no criteria in mind means there is a high chance you will be unfocused or ineffective. You also run the risk of acquiring the wrong company and fulfilling none of your growth goals if you rely too heavily on first impressions.

A better way to approach acquisitions requires a bit more upfront work, but leads to a higher rate of success. Before you even begin looking for acquisition candidates you should define your ideal acquisition markets and candidates using measurable, objective criteria. Pick four to six important criteria to focus on and develop quantifiable metrics for each one. Write these attributes down so everyone has a copy so that you all have an objective standard for measuring every market or prospect. This will prevent you from getting too emotionally attached to a company simply because it seems like a good idea. Instead, you will have to use data to prove (or disprove) the strategic fit.

Using criteria to make decisions doesn’t mean acquisition should be completely devoid of emotion. Naturally your experience will (and should) come into play when analyzing and evaluating each opportunity, but it should not be your only guide. Start with your ideal and then try to find a company that matches closely so that you can achieve your strategic growth goals.

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“I’m not interested in selling my business right now.”

“We already have a strategic plan in place.”

“We are already talking to another buyer.”

“Why should I listen to you? I get asked to sell all the time.”

“I may sell in a few years when my company has a higher value.”

“Who are you????”

“No.”

These are the typical responses owners give when contacted for the first time about selling their business. While it can be discouraging to hear “no,” it would be more surprising to hear an owner say, “Yes, I am ready and willing to sell you my business over the phone right now!” Experienced acquirers know that an owner’s initial “no,” is simply a knee-jerk reaction resulting from surprise more than anything else.

The majority of owners of privately-held businesses, especially those that are healthy and run well, are not operating their business with the intent of selling. They are focused on growth and delivering products and services to their customers. Just because someone is not currently thinking about selling does not mean that their company is not for sale. Click to continue reading on The M&A Growth Bulletin.

This article originally appeared in The M&A Growth Bulletin, Capstone’s quarterly newsletter that delivers essential guidance on growth through M&A along with tips and tactics drawn directly from successful transactions completed in the market. Subscribe today to read the current edition and receive The M&A Growth Bulletin every quarter.

You don’t have to “go big or go home” to successfully grow your company through M&A. A small, well-executed acquisition that targets a specific need can sometimes be more powerful than a multi-billion dollar consolidation. Let’s take a look at a recent example from the news.

Earlier this month, Conagra announced it would acquire Thanasi Foods out of Boulder, Colorado. Founded in 2003 by Justin “Duke” Havlick, Thanasi is a privately held company with less than $20 million in revenue and sells two products: Duke’s meat snacks and Bigs sunflower and pumpkin seeds.

On the other hand, Conagra is an $11.6 billion company with an established product portfolio which includes brands such as Marie Callender’s and Healthy Choice. So why is Conagra purchasing such a small acquisition? Conagra needs more SKUs, especially value added or “premium” products that will deepen its relationship with customers like Walmart, which is Conagra’s top customer.

Although Thanasi is a small company, its products already have some traction and customer approval in the marketplace. Duke’s and Bigs are sold in 45,000 retail locations and are in fast-growing segments. Depending on how you look at it, Duke’s and Bigs is a compliment or competitor to Conagra’s Slim Jims and David-branded seeds. Essentially Conagra is purchasing a form of proven R&D to run through their pipeline of customers on a larger scale.

Acquisitions don’t have to be huge to be significant. Especially in the middle market, a carefully planned, small, strategic deal can exponentially grow your business and help you reach your goals. Meaningful transactions are those that help your company become increasingly focused and effective, so don’t get too caught up in the numbers.

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“We did an acquisition about 15 years ago. It did not go well…I guess you could say we are still ‘recovering,’ the CEO of a family-owned business recently shared with me during a meeting.

She went on to explain there were a number of integration issues and other challenges that cropped up post-closing that the company was not prepared to handle. From payroll issues to disgruntled employees to operational challenges – the experience was “traumatic,” for the organization according to the CEO.

Fortunately, the company is in a better place today and is ready to explore new ways to grow. While leadership recognizes the potential of a strategic acquisition, because of their previous experience, they are, understandably, hesitant.

It’s not uncommon to have this reaction. But just because an acquisition didn’t work in the past, it doesn’t mean you have to abandon M&A as a tool for growth. You can learn from what went wrong last time and be successful when executing future deals.

There are many reasons deals fail from culture clashes, hidden liabilities, poor planning, or simply inadequate of expertise, but these issues point to one overarching reason for acquisition failure – lack of strategy. Alarmingly, many companies take on a reactive approach to acquisitions, buying whatever company comes their way without first developing a strategic plan. Not having a plan is a surefire way to fail.

In the case of our family-owned business, they decided to take on a strategic approach to M&A this time around. Unlike last time, where they adopted a “plan as you” approach to M&A, they dedicated serious resources to establishing a strategic plan for acquisition prior to even looking at companies. This included identifying potential integration challenges and developing a 100-day post-closing plan long before the deal closed to avoid the same issues as last time. With a firm foundation the company was able to identify the right opportunities for growth and execute a successful transaction.

If you are still suffering from the results of a failed acquisition, I encourage you to adopt a strategic approach right now. Gather your team together to review your growth options in light of your overall strategic vision. Then, you can determine your next steps whether its organic growth, external growth, minimizing costs, exiting a business, or doing nothing. With a strategy in place, you will avoid many pitfalls and maximize your chances for success.

It seems like 2017 will be a strong year for acquisitions. A new report highlights a number of factors that could drive activity this year including the record levels of cash held by private equity firms and a favorable lending environment for borrowers.

Potential changes to U.S. tax policy under the new administration could reduce the corporate tax rate and encourage companies to repatriate offshore cash to invest in acquisitions.

2016 was a year full of uncertainty, from Brexit to the U.S. presidential elections, but as the economic and political landscape stabilizes, business leaders are regaining their confidence. 80% of executives surveyed predict M&A activity will increase in 2017. These market conditions may be the right recipe for increased acquisitions, especially for companies facing poor organic growth prospects.

In the first quarter alone, a number of significant transactions have been announced including the owner of Burger King and Tim Horton’s acquiring Popeyes, Mars acquiring pet hospital company VCA, and Intel pushing into the self-driving car space by purchasing Mobileye. These deals will likely spur additional acquisitions as key players react to changing industry dynamics and competition.

While we don’t know if M&A in 2017 will match 2015’s record level, we can certainly expect an uptick in activity for the remainder of the year.

Photo credit: Igor Trepeshchenok / Barn Images 

3M, the maker of Post-it, will acquire Scott Safety from Johnson Controls for $2 billion to build up its safety division. This is the second largest acquisition for 3M after its purchase of Capital Safety, a maker of fall protection equipment such as harnesses, lanyards, and self-retracting lifelines, from KKR & Co. for $2.5 billion in 2015.

Scott Safety’s products include respiratory-protection products, thermal-imaging devices, and other products for firefighters and industrial workers. The company will become a part of 3M’s safety division, which accounts for 18% of the company’s sales in 2016 and is the second largest division.

3M is using acquisitions to boost slow growth in the US and to combat industry challenges in the consumer and electronic sector. In 2016, 3M executed a number of acquisitions and divestments as part of its realignment strategy. The company sold its temporary protective films business, safety prescription eyewear business, and pressurized polyurethane foam adhesives business. 3M also purchased Semfinder, a medical coding technology company.

Here are two lessons for leaders who are thinking about company growth.

1. Acquisitions can jumpstart growth.

When organic growth options such as, opening a new store or adding new products, fail to grow revenue significantly, it may be time to look at external growth. Strategic leaders evaluate shifting industry dynamics to anticipate future demand and then use acquisitions to reposition their companies to capture a share of the high-growth market. When completed, the acquisition of Scott Safety will add 1,500 employees, $570 million in revenue, and a slew of products immediately to 3M’s safety division.

2. Acquisition isn’t just about getting bigger.

Acquisition is truly about recalibrating your business and focusing on strategy. Although 3M is acquiring Scott Safety, the company also divested of a number of businesses in 2016 and is paring down from 40 business units to 25.

On the other hand, the seller, Johnson Control is also realigning their business with this divestment. “Consistent with our priority to focus the portfolio on our two core platforms of Buildings and Energy, we continue to execute on our strategic plan.” said Johnson Controls Chairman and CEO Alex Molinaroli.

Photo Credit: Dean Hochman via Flickr cc

One of the most effective ways for strategic buyers to grow through acquisitions is to “take frequent small bites of the apple,” or to conduct a series of smaller, strategic acquisitions in order to achieve a growth goal. Even those these deals might not be as “exciting” as mergers between two huge competitors, they can be just as (or even more) impactful for an organization’s success.

A recent example of this approach is German chemical manufacturer Evonik, which is building its cosmetic ingredient business through acquisitions. On March 13, the company announced it will acquire cosmetic ingredient manufacturer Dr. Straetmans GmbH for $107 million. The deal is Evonik’s second in the cosmetic ingredient sector; last year, the company acquired Air Products and Chemical’s coatings and additive operations for $3.8 billion.

It is possible to achieve significant growth by executing smaller deals and sometimes an iterative process can be more effective than one sweeping change. Most of us have probably taken a class or read an article on leadership about achieving goals where a common suggestion is to break down a large goal into achievable steps. Executing a series of strategic acquisitions is similar. Each deal builds on the previous one, like a step in a staircase, bringing you closer and closer to your goal.

Change, even good change, can be difficult to process and many companies struggle when it comes to post-merger integration. This risk is greatly reduced with a small deal because it is easier to digest and there are fewer moving pieces. In between deals you have time to adjust, evaluate your newly merged company and determine when and how to pursue your next deal. This time of re-calibration between deals will help you build a strong foundation for achieving your dreams.

Photo Credit: Nicolas Raymond via Flickr cc

There’s a myth that acquisitions are only executed by huge, publicly-traded, Fortune 500 companies, but that’s simply not the true. In reality, there are many acquisitions conducted by small and middle market firms that are private transactions and are not reported to the media.

There are many reasons to consider acquisitions, regardless of the size of your business. A smaller, highly focused acquisition can grow your company and be incredibly profitable. In fact, small transactions allow you to execute your strategy covertly and avoid alerting your competition to your growth strategy. With a small, strategic acquisition there is less of a risk of integration issues and acquisition failure because the deal is not transformative for the organization. At the same time, a small, strategic acquisition can fulfill a targeted growth need and positively impact a company’s long-term growth.

Another reason people don’t consider acquisitions is because they think they are too expensive. While acquisitions do require a significant amount of financial resources to execute, the cost of organic growth or doing nothing may be higher than the cost of M&A. When looking at the bigger picture, it may be more expensive to develop a new product on your own or take too much time. Companies often use acquisitions to move quickly and implement a ready-made solution. If you are concerned about cost, keep in mind there are ways to mitigate the price of a deal. Only you can determine if acquiring or building your own solution is best, but you should consider both options simultaneously.

Whether or not you decide to grow through external or organic growth, you should consider both as tools, regardless of the size of your company. For every company, unintentionally falling into the trap of doing nothing is dangerous. Innovation, either from external growth or through in-house development, is key to long-term success. Think about companies that lost their edge do to failure to innovate. Blockbuster didn’t adapt from DVD to streaming and lost out to Netflix and Redbox and the once dominant BlackBerry, which failed to compete with iPhone. The cost of unintentionally doing nothing can mean your services and products become obsolete, so make sure you consider your next steps with the future in mind.

Photo credit: Barnimages.com via Flickr cc