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Growth Strategy: Mergers and Acquisitions

March 31, 2020
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CFO Consulting Services > Growth Strategy: Mergers and Acquisitions

Is a merger or acquisition a growth strategy?

For a small/medium size business in the early growth cycle, buying another company or a competitor may be an excellent strategy to grow the business. Use the following checklist to evaluate if conditions merit a merger & acquisition growth strategy. There are other industries or company-specific questions to consider, but for simplicity, let me address initial merger strategy questions only:

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Questions to consider

1. Local vs. National market: does your business primarily compete in a local or national market?
2. Competitive Landscape: do you have many competitors in your area?
3. Barriers of Entry: can new players easily enter your market?
4. Is the business or industry “sticky”?
5. Is your business making at least $100K in Ebitda?

Check your answers

You should consider buying a competitor as an alternative or additional growth strategy 

If the answers to the previous questions are:
1. Primarily local market, 2. No, 3. Not easily, there is a high barrier of entry, 4. Yes, 5. Yes
 
If your are primarily a local player with a limited number of competitor, you could consider buying a competitor for their customer base or technical know-how.   For example, if your company provides IT services and there are only ten players in your geographical area.   
 
If you own a restaurant, there may be 100s of local and national chains in your given local market and then a merger or acquisition is not a good idea.

Sticky business

A “sticky business” is a business like an IT service provider where there may a contract that prevents you from changing providers or a situation where is costly or time-consuming to switch providers, such as a payroll company. The “stickier” the business, the more it makes sense to consider a merger or acquisition.
In the case of a pool cleaning or landscaping company where there may only be ten companies in the area, M&A may not be a good idea because anybody can easily open a pool cleaning or landscaping company, therefore buying another company may not be worth the money. At the same time, there is nothing “sticky” about a pool company.

 

Is this a viable growth strategy?

Your business on a stand-alone basis must be profitable and have the resources to buy another company. Of course, you can leverage and use borrowed funds to structure the deal, but for a small/medium size company is a good idea to have the majority of the purchase price on hand. If your business is only growing 5% to 10% a year, an M&A strategy can immediately double that figure. Of course, nothing is free, and you should expect to pay a premium (i.e., goodwill) for the additional sales.
 
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