Thorough market research has multiple benefits for the astute M&A operative. It sets you apart from other buyers by arming you with crucial information when approaching prospects.  It also constitutes one of the early steps in the due diligence that is part of any acquisition program. This is a vital consideration. The conventional concept of “due diligence” is a formal process that begins late in the buying process. With the Roadmap approach we use at Capstone, due diligence starts from day one. Undertaking quality research early on will protect you from costly surprises later, and in fact makes the formal vetting that will be required later far smoother and less disruptive.

In most cases, you’ll need to conduct both primary and secondary research.  Secondary research, where you draw from public sources such as the Internet and databases, is the easier of the two. When your focus is markets rather than individual companies, secondary research can reveal a wealth of information about market size, growth rates, supply chains and other market dynamics. The US government, Wall Street and individual industry associations have plentiful market information publicly available that may be pertinent.

Performing primary research successfully is an art.  You are asking for someone to spend time with you answering your questions with no obvious benefit to them.  You must move quickly and be specific with your questions.  You are not conducting a survey but an exploratory conversation.  In the back of your mind, of course, you have a list of targeted questions about the market you are researching.  However, you should avoid bombarding people with a series of questions. Rather, those questions should be mixed with comments and observations that you bring to the exchange.  This is where secondary research is invaluable in giving you a basic level of knowledge about the market and credibility with your source.

You can play to your source’s ego, telling them that you understand that they are expert in the field and asking for their guidance.  While you will occasionally find someone who is unwilling to help (or even rude), I have found that people generally like to talk about subjects on which they are considered knowledgeable.

To get a rounded picture of a particular market, it’s a good idea to check in with a mix of customers, suppliers and distributors. And remember, sales people usually love to talk — it’s their job!

Technorati Tags: Acquisition Strategy, Capstone, David Braun, External Growth, M&A, mergers, Mergers and Acquisitions

When you’re going after an acquisition, you need clear and compelling reasons— not just for
your choice of target company but for your choice of market. The only way I know to do that right is to define your
criteria in advance. Needless to say, your specific market criteria will be driven by the unique circumstances of your
business. 

That said, there are common factors that most people consider when they are reviewing possible markets. Let’s list them here:

Market size (usually measured in dollars of revenue). Remember, bigger is not
necessarily better, and you may find greater success in a smaller, niche market.
So the criterion of size needs to be considered in relation to other factors. 

Market segmentation. You will do best to begin by researching and prioritizing
broadly defined markets and then focus in on individual segments in the highest
priority markets.  

Market growth rate. This is the simplest (and the only) indicator of healthy future
demand, usually the single most important determinant of success. 

Number and strength of major players. The field always narrows at the top,
but the question of how narrow gives an important indication of the competitive
environment. 

The customer profile. The kind of customer a market serves is significant.
For example, if your experience is exclusively business-to-business, you
may think twice about buying a retailer

Other typical criteria used when evaluating markets are barriers to entry, technology requirements and intellectual property issues. 
And again, you may have additional issues to consider that are exclusive to your objectives or business environment. The point to
emphasize is that without predefined criteria, you will be pushed and pulled by whatever data and opinions pass across your desk.
With them, you’ll have a way to make decisions with a measure of objectivity.

Technorati Tags: Acquisition Strategy, Capstone, David Braun, External Growth, M&A, mergers, Mergers and Acquisitions

Before you look for a company to buy, you need to define the market where you will search your target.

Why? The fact is that in almost every business situation, growth follows demand.  The reason you pick your market before you choose your prospects is to ensure there is a healthy, stable demand for your acquisition partner’s products or services.  Without that certainty, you should beware of the most tempting buying opportunity. A sweet-smelling prospect in a no-growth market may well turn out to be a lemon.

To make a good choice of market, as for any important decision, you need clearly defined criteria. Here are some guidelines for building effective market selection criteria, based on years of practice with companies in a variety of industries:

• Focus on strategic aspects early — For example, if your one reason for acquiring is to bring a current competency to a new market, you will want to make sure that whatever new market you acquire into is growing.  In this case, growth rate will be one of your earliest criteria.
• Be realistic about the availability of information — You may not be able to get growth rates for the last twenty years or sales figures for the previous year immediately.  As you move along in the process, you will gather increasing detail about the market (and individual prospects), but in the beginning, you can make do with relatively broad information.
• Limit to no more than six criteria — If you have more than six criteria, you can lose focus on the most meaningful strategic aspects.  However, each individual criterion may have multiple metrics.  For example, the criterion “customers” may include the size of the customer base, switching costs and geographic distribution.
• Make it measurable — When conducting your research, establishing metrics will give more power and focus to your decision-making process.  For example, it is more useful to say that you seek a market with a growth rate of at least 8% rather than just a market that has “strong growth”.

Choose the market before the prospect and establish clear criteria for your market choice: seems like common sense? You’d be surprised how frequently these critical steps are skipped by over-eager M&A practitioners.

Technorati Tags: Acquisition Strategy, Capstone, David Braun, External Growth, M&A, mergers, Mergers and Acquisitions

When you’re considering growth through acquisition, it may seem obvious to focus on companies that are actively searching for a buyer. In fact, this is the most common procedure, widely advocated by investment bankers. However, it is an approach that will severely limit your chances of finding the right company.

For-sale companies are often “for sale” for a reason.  Whether the reason is financial difficulty or ownership problems, it can make these targets much less attractive.  Also, with for-sale companies, there are often multiple interested parties (including your competitors), allowing the seller to drive up the price.  This can shift the balance of power to the seller.   Finally, the inventory of for-sale companies can dry up quickly, leaving you with too few options and backing you into the corner of trying to make an inappropriate company fit your one chosen need.

At Capstone, we usually guide our clients to focus on “not-for-sale” candidates. When a company is “not-for-sale”, it simply means it isn’t actively seeking a buyer. If through your search and screening process, you discover a company that could be the right fit for your acquisition criteria, then it should be pursued.

The central point here is that every company is for sale — for the right equation.

“Equation” almost always means more than price. It can include timing, ownership, reputation, vision, location and a host of other factors related to the owner’s values and aspirations.  There’s a lot that goes into putting that equation together.  For now, the point I’d like emphasize is: don’t exclude any company from your acquisition search simply because it isn’t wearing a “for-sale” sign.  If you find a company that you believe is the best candidate to meet your chosen strategic need, then my advice is: go for it.

Pursuing not-for-sale companies holds several significant advantages.  Not-for-sale companies put you in a proactive, rather than a reactive, position, allowing you to choose what you want.  The management team of a not-for-sale company will be actively engaged in the business, not eyeing the exits. Often they will be eager to stay on (if you want them to) after the deal is done.  Another benefit of looking at not-for-sale companies is that you can maintain stealth in the marketplace, allowing you to pursue an acquisition that no one else knows about.  It also lets you avoid the auction process, which often drives good people out, and prices up.

Finally, by including not-for-sale companies in your search, you have significantly expanded your universe of potential acquisition prospects.

Technorati Tags: acquisitions, Capstone, External Growth, Growth, Integration, M & A News Acquisition Strategy, M&A, mergers, Mergers and Acquisitions

You could assume that as an M&A expert I’m in the business of acquisitions. But I prefer to say that I’m in the business of external growth. Sometimes, growth is served by taking other routes than acquisition. One of those can be a simple strategic alliance, which can play a useful role in expanding opportunities — within limits.

Suppose you see the need to expand your customer base, but you have hit a ceiling with your current marketing and sales effort. One step you can take is to form an alliance with a partner who is serving the customers you seek with a non-competing product. You can structure the arrangement in countless ways. Perhaps the partner benefits from simply being able to expand his offering; perhaps you pay a commission on sales or leads; perhaps it is more of an exchange, whereby you simultaneously market your partner’s product to your existing customer base.

The appeal, but also the risk, of such an arrangement lies in the absence of equity investment. This means that neither party has an ownership stake in the outcome. Of course the legal contract of the alliance can have everything nailed down beautifully, but there is a significant difference, in terms of energy and commitment, between a legal obligation and a true business commitment.

The strategic alliance tends to the character of a one-night stand, and in fact I advise my clients to restrict such alliances to short-term agreements. I also like to see alliances focused on very specific and limited objectives, such as securing a better network of representatives. With these caveats, the alliance tactic can deliver tangible benefits.

Nevertheless, the question is bound to arise at some point in the relationship: What next? If the alliance falters, the obvious outcome is to withdraw at the end of the contract. But what if it goes well? There may come a time when you will be trying to figure how to get up to the next level, with some kind of equity involvement. I like to address this issue right from the beginning and write into the contract an option for equity purchase if certain conditions or benchmarks are achieved.

Giving the agreement more teeth may take some extra effort at the start of the relationship, but it will open the door to substantially greater benefits in the long term.

Technorati Tags: acquisitions, Capstone, External Growth, Growth, Integration, M & A News Acquisition Strategy, M&A, mergers, Mergers and Acquisitions

When we begin work with M&A clients on their Growth Program Review we normally use Michael Porter’s model, the Five-Forces Analysis.  This shows the five key forces acting on a company’s destiny: Competitors, Customers, New Entrants, Substitutes and Suppliers. 

This model invites you to look at the pressures on your business from several key perspectives, and provides a tool both for diagnosis and prescription. What I like is that it pushes you to see beyond competition, where most business owners tend to get fixated. 

I recall a client in the financial software industry whose entire strategy comprised a breathless reaction to what his competitors were doing. If they added a new function to their application, he set his team to work making a better version of the same upgrade. If his competitors broke into a new geographical market, he dispatched his sales team to set up office there. It was the ultimate “me too but me better” approach. Not a very robust recipe for growth. 

The Five Forces model gets you asking a different set of questions, about for example how changes in supply might affect your business, or what barriers face new entrants to the market, or where new technologies might displace your current offering. 

To my mind, by far the most important element in Porter’s model is “Customers” because this is the key to future demand. In fact, my one quarrel with Porter is that he positions this element to one side and places Competition in the center. I usually reconfigure it to make Customers — that is, future demand — the centerpiece of the diagram in place of Competitors.

Possibly the single most important shift in thinking Capstone brings to clients lies exactly here. We pull their attention away from their competition and on to their market. Together, we break the spell of the present and lift our eyes to the future.

Technorati Tags: acquisitions, Capstone, External Growth, Growth, Integration, M & A News Acquisition Strategy, M&A, mergers, Mergers and Acquisitions

At Capstone, we talk a lot about “company DNA”. It’s a big focus when we are at the early strategic stage with a new client.  At the outset, we encourage them to ask themselves, “What’s our DNA?”

The company DNA cannot be read off a nicely worded mission statement hanging in your reception area. It is most vividly expressed by what actually happens, day by day, inside those four walls.

As in the human body, your DNA is the aspect of the company that is very, very unlikely to change. IT systems can be replaced. Financials rise and fall. Employees come and go. Procedures get rewritten, product lines are added or removed, marketing strategies get turned upside down. All these are important, but transient, realities of business life. However, there is something about your company that remains stubbornly the same throughout the vicissitudes of the business environment. We’re talking about the underlying character of your firm, in the sense one would speak of an individual’s character. 

If you want to know your company DNA, take a look at these questions:

How are decisions made? By top-down command, or collaboratively? Slowly and ruminatively, or rapidly and instinctively? How are hiring choices arrived at? Strictly on credentials and capabilities, or just as much on personality and team fit? What level of autonomy is given to departments and individuals? How focused is the company on innovation? What value is really placed on customer service? Is the firm more strategically driven, or more opportunistic and reactive? What is the attitude to pricing and discounts? How aggressively do you tend to pursue new business, new technologies, or new talent?

Knowing your company DNA will impact your growth strategy in a couple of ways. First it will help you spot which avenues of growth are most likely to fit the mold and which potential acquisition targets would make good collaborators. Secondly, it will give you useful practice in sizing up those targets themselves. Just as you need to know your own DNA, you will want to know your future partner’s.

Both of you need to take a blood test before a marriage is considered. 

Technorati Tags: acquisitions, Capstone, External Growth, Growth, Integration, M & A News Acquisition Strategy, M&A, mergers, Mergers and Acquisitions