If you are growing your business with an exit in mind, you will have already worked out what your desired exit number is as well as planning how to get there. To get your company from Point A to Point B (being the number you require for your chosen exit strategy, such as a PE exit), you need to put two different types of action in place: organic growth and acquisitions.
Organic growth is about generating more revenue and more profit from your existing business. How you do that is dependent on your market and your product, but essentially, you are going to develop your USP and you are going to upsell and cross-sell. For example, you might call all the customers you have done business with in the past and say, ‘Hey, why aren’t you giving me any business this year? What are we doing wrong? What do you need from us?’. Not only will this provide you with growth opportunities, but also invaluable feedback to refine your client services.
In addition to this, this is also the time to implement your acquisition strategy. For a small company, one acquisition per year is a good aim. Don’t attempt more than that because, however simple it might seem to buy another business, there will inevitably be cultural issues, staff issues and brand issues to resolve that will require your full attention.
When planning acquisitions, first choose your target sector. If you are an electrician installing solar panels, your first target might be a roofing company. If you are a front-end software company, like I was, you might aim to buy a business that supplies back-office software. If you are thinking of buying a competitor, there could be a major credibility risk. You have spent the last ten years saying that your product, Product A, is the best in the world and the product you are thinking of buying, Product B, is rubbish. Now suddenly you have to say, ‘Oh, by the way, I now also own Product B, which, it turns out, isn’t nearly as bad as we thought it was…’ Besides, you don’t want two products that do the same thing. Therefore, you decide to phase out Product B and force all Product B users to switch to Product A. This likely won’t please Product B users at all.
Once you have your target sector look at three or four potential companies within it. Who are the
leaders? Who is struggling? You might think it sheer madness to buy a company that is in trouble, but ‘distress buying’ can be amazingly successful – depending, of course, on the reasons the company is in trouble. If they are struggling because they have a bad product, you will look elsewhere; but if they have a good product and are struggling, it’s worth looking deeper to see why. It might be that they are simply paying their staff or their C-suite too much. If so, that’s not a big problem – after your acquisition, you may not need those people anymore.
If you think you will be able to find hidden value by making a few changes and achieve economies of scale, the company could be an interesting acquisition. If they are a limited company and so must publish their accounts, you can assess their (potential) profitability directly, but one of the best sources of information about other companies is your own clients. Ask them which ones they think are struggling, which ones they love doing business with, which ones they might buy from and so on. Ask your employees and your network, too – it might surprise you what they say.
Look in particular for companies that are too small for a PE exit whose owners are in their sixties or seventies and don’t have children who are clearly interested in taking over the company. You will find lots of these, and they are among your best candidates for acquisition.
These are some tips to start your acquisition journey, but remember to do ample due diligence into which you deem to be potential options.
This is an adapted extract of ‘Cashing Out” by Alexis SIkorsky
About the author
An entrepreneur since the age of 15, Alexis Sikorsky started a software development company called New Access in Switzerland in the year 2000. Twenty years later, he sold the company to a PE firm for a nine-figure sum and set up Alex Sikorsky Consulting Ltd, enabling SMEs to build their business and develop effective growth strategies leading to a PE exit. He has now distilled decades of insights into his new book Cashing Out to equip and empower entrepreneurs through the PE process.
