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.

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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.

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When contacting an owner about acquisitions, don’t be surprised to hear “no.” Most owners, when asked about selling their “not-for-sale” business will automatically refuse simply because it’s unexpected. Remember, for an owner focused on running the day-to-day operations of his business, this offer is coming out of the blue. There are, of course, a number of other reasons why owners don’t want to sell including history, age, family, and community. Don’t be afraid of rejection or give up after the first try. If you are persistent, you may find the owner is open to at least talking to you or meeting with you to hear you out.

However, in some cases, despite your determination, you may find that the owner still is not interested in selling or any type of partnership. So what do you do? Do you keep calling him or do you give up?

When contacting an owner about selling his “not-for-sale” business you must be persistent, but not obnoxious. It’s important to strike the right balance. If you’re at an impasse with an owner who is not budging on his “not-for-sale” position, there are a few strategies you can employ.

Write the Owner a Letter

If the owner is still refusing to meet with you after multiple phone calls, try taking the conversation from verbal to written. In a letter, you don’t seem as pushy and the owner has more time to think through his response rather than react in the moment.

Stay in Touch

If the owner still seems uninterested after a letter, put him on a keep in contact list. We have a list of prospects that we call every quarter to check in and see if anything has changed since we last spoke to them.  A big part of acquisitions is timing and an owner who is not ready to sell today, may be ready six months down the road. When something changes in his business and the switch flips, he may pick up the phone and call you. While there’s no guarantee that the owner will sell, at least if you made the initial approach, when he is are ready, you will be at the top of the list as a potential buyer.

Move on

If you’ve tried both of the strategies listed above and still have not had any success, it may be time to move onto another prospect. You shouldn’t keep beating a dead horse and some owners are really not going to sell their business no matter what.

If you have a robust pipeline of acquisition prospects that you are pursuing in parallel, this won’t be a major setback to your acquisition program. With many options you increase your chances of a successful acquisition.

Acquisition can be a powerful tool for accelerating your company’s growth. 2016 may be the year you build on your capabilities, add new services or products, gain new customers or enter new markets. However, it’s important not to get swept away in the excitement of a deal and to remain strategic. A carefully planned, strategic approach greatly increases your chances of successful M&A and long-term business growth. As you consider growing your business in the new year, here are some tips for remaining strategic in 2016.

1. Begin with strategy.

Your overall growth strategy should be the primary driver and guide for your acquisition. While this is a simple principle, it can sometimes be forgotten in the excitement of the deal. Do not acquire a company simply for the sake of acquiring a company. While acquisition can be a powerful and rapid tool for growth, buying the wrong company can be an expensive mistake!

2. Use a demand-driven approach.

In our typical M&A process, we have clients pursue markets before researching individual companies. The reason is that selecting the right market is critical to successful growth. The market should have healthy, stable demand for your products or services and be aligned with your overall growth strategy. We strongly recommend selecting a market prior to identifying acquisition targets or potential partners. Without understanding market dynamics, you may be tempted to pursue what looks like a promising opportunity, only to find that the market is in a serious decline. In addition, market research will help you enormously when it comes to evaluating and identifying potential companies to acquire.

3. Develop measurable criteria.

Again, the criteria should be aligned with your overall strategy. Criteria can include growth rate, size, geography, customers, or key players. It’s best to pick six criteria – too few and you won’t cover all necessary aspects, and too many will cause you to lose focus. Begin your research at a high level and then progressively zero in on individual market segments you find attractive as you gather more information. As your research progresses, you’ll have a better understanding of the markets. Make sure to use your criteria to remain objective.

4. Expand beyond the “usual suspects.”

It’s important not to fall back on the “usual suspects” or businesses that are already known to you. There’s nothing wrong with pursuing “usual suspects,” but they should not be your only source of candidates. Turning to these companies alone may mean you are ignoring a whole host of companies that could be strategically valuable acquisitions. Conducting market research will likely help you identify fresh companies that you didn’t even know about.

5. Remember the human factor.

Acquisitions involve much more than just financial figures. It’s extremely important to develop relationship with owners, especially in privately-held, not-for-sale acquisitions. Many times owners view their company as their baby and convincing them to sell to you involves much more than just a fat paycheck. Consider the owner’s drivers and motivations. What does he or she really care about? Developing a strong relationship with an owner early on in the M&A process will greatly benefit you when it comes to due diligence and negotiations.

Best of luck in pursuing strategic acquisitions in 2016. For more tips on strategic M&A, be sure to subscribe to the Successful Acquisitions blog.

 

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The pharmaceutical and healthcare industry shows no sign of slowing down in terms of M&A and consolidation. There have already been $427 billion in transactions according to Dealogic data.

Last week Pfizer and Allergan announced that they are currently in merger talks to form one of the largest pharmaceutical companies in the world. Certainly one motivation for the deal is to capitalize on lower tax rates outside the U.S. Allergan is based in Ireland and is  expected to enjoy a tax rate of just 15% this year compared with U.S.-based Pfizer’s rate of 25.5% last year. Of course, this wouldn’t be the first tax-incentivized merger we’ve seen in healthcare.

Meanwhile, Walgreens and Rite Aid plan to combine in a $9.4 billion acquisition — another mega-deal to fuel the fires of M&A activity in 2015. If the acquisition moves forward the new company would own 128,000 drugstores, consolidating two of the three largest drugstores in the U.S.

Big Healthcare Gets Bigger

These large mergers and acquisitions illustrate a phenomenon that I’ve been talking about for quite some time: what I call the “dumbbell” effect. At one end of the dumbbell, large corporations continue to size up, and at the other end small mom and pops and startups are flourishing. In between, middle-market businesses are getting squeezed.   The dearth of smaller, middle-market companies is easy to identify in the retail space, where it’s visibly more challenging for independent outfits to survive.

For example, in the restaurant industry, it’s increasingly hard for independent players to afford the costs of commercial leasing as chain restaurants exploit the economies of scale and their sheer purchasing power.. In some ways it’s similar for the healthcare industry, where the flurry of deal activity is about consolidation, purchasing power, retail leases, and the most favorable contracts with retailers and insurers. Smaller companies are also under enormous pressure to deal with the cost of complying with regulations.

The big pharmacy mergers are mostly about grabbing market share on both the West and East coasts. Walgreens and Rite Aid both have a strong presence in California and New York and Massachusetts, while CVS’s acquisition of Target Pharmacy strengthens its presence in the Pacific Northeast.

Whatever the appearances, Walgreens is using its acquisition of Rite Aid to ensure the company is large enough to compete in terms of distribution, channels, and customers. When compared to CVS, Walgreens isn’t huge ($76.4 billion in 2014 revenues vs. $139.4 billion 2014 revenues). Even at that scale, it’s becoming more difficult to be the smaller player simply because of the burden and cost of regulatory compliance and ensuring that you have the right healthcare plans, contracts and exchanges to remain competitive.

Advice to Middle Market Companies

In the current climate, my advice for middle-market companies is this: Figure out how to continue growth by whatever means necessary. You’ll probably have to do something different than simply grabbing market share because you don’t have the resources of a a huge publically traded company. A strategic use of acquisitions can be a smart way around this dilemma. What’s certain is that if you don’t take action you risk becoming a “me too” player, or simply obsolete.

Wherever there is a challenge, there is also an opportunity to think outside the box and differentiate yourself – whether it’s in terms of service, technology or something else unique to your business. Middle-market companies have one key advantage: the freedom to be agile and offer new, insightful solutions for their customers in ways that large corporations can’t. Keep your growth strategy top of mind as you think about your company’s plans for 2016 and beyond.

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Tax implications can significantly alter how you structure a deal and even the price of your acquisition, so it’s important to understand their effect. Join us for a webinar on Tax Considerations in Mergers & Acquisitions and uncover what you need to know about taxes in M&A and gain an understanding of tax issues.

Join Capstone for a webinar led by Alexander Lee, a Partner at Paul Hastings and head of the transactional tax practice in Los Angeles. He has over eighteen years’ experience advising on corporate tax issues and has provided tax advice on over one-thousand domestic and cross-border mergers and acquisitions transactions.

After attending this webinar you will be able to:

  • Identify the tax motivations for buyers and sellers
  • Describe the different forms of M&A (Stock, Asset, Merger)
  • Explain the tax implications for C Corporation vs. S. Corporation, Partnerships or Limited Liability Companies
  • Understand taxable transactions vs tax-free transactions

Date: October 15, 2015
Time: 2:00 PM ET

CPE credit available.

Click to learn more and register.

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Capstone CEO David Braun will present “Strategic Alliances, Joint Ventures and M&A – the Route to Success?” at the 2014 European Base Oil & Lubricants Summit in Alicante, Spain on September 18.

The two-day conference brings together leading executives and experts in the lubricant and base oil industry from established Western Europe and U.S. markets and from emerging markets, including Central and Eastern Europe, India and the Middle East.

Over 150 C-suite, senior-level executives, directors and managers will attend the summit, including representatives of such industry leaders as Chevron and ExxonMobil.

In his presentation, David will challenge attendees to consider their five options for growth as the base oil and lubricant markets face new challenges and regulatory developments. Strategic alliances, joint ventures or mergers and acquisitions can help companies identify new opportunities and ways to grow.

“I am eager to engage leaders in discussion about proactive growth and hear their analysis of market dynamics and trends,” he said.

The conference will focus on the global base oil trade, analysis of the European lubricant market, challenges and opportunities for automotive and industrial lubricants, regulatory developments and technology advancements in lubricants.

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M&A activity is at the highest level it’s been since before the recession in 2007. We’ve been talking about an uptick in deal activity since last year and now we’re finally seeing real traction. So far in 2014, there have been $1.7 trillion in deals.

In Q1 2014, US deal value was up 56% and the number of deals increased 36% when compared with Q1 2013, according to MergerMarket data.

This boom in M&A activity can be partially be attributed to a “follow the leader” mentality. When large, companies like GE start making highly publicized acquisitions, other executives are inspired to follow in their footsteps. In addition, over the past couple of years, many businesses have also held off on acquisitions due to the economic climate. Now, as the economy recovers, they are ready to execute strategic acquisitions.

I’m excited to see what deals emerge in the remainder of 2014 and will be on the lookout for interesting strategic acquisitions.

Are you considering an acquisition? Remember, when it comes to buying companies, especially privately held ones, the transaction is almost never about just the price. There is always something going on that falls outside the spreadsheets. Understanding that mysterious ‘‘something’’ is what can make or break your deal. The statistics are frightening. By most reckonings, 77 percent of company acquisitions fail to deliver expected outcomes. Don’t be scared off acquisition as a dangerous path to take. Without a plan, it is indeed a dangerous path. But with the right roadmap  buying another company can prove the fastest, most secure, and most profitable way to grow your own. Stay tuned to my blog and I will show you a world of M&A that is both fascinating and accessible.

 

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