12 Jul How to Beat the Competition when Buying a Business
Like all things in business, the laws of economics apply. Supply and demand drive interest, valuations and structures. Over the last 18 months, we have seen increased competition in deals and we wanted to share some trends that are emerging surrounding successful combinations and how suitors are treating sellers throughout the process.
Locating the right assets: While traditional deal flow typically came through brokers or bankers who are supporting the mid to large size buyers or even sellers, today we are seeing more deals sourced through less conventional sources; Look at venture capital deal flow (and other financial sources) along with founder led businesses as an alternative to the shiny objects in the market. Also be assertive in your solicitation and be prepared to get creative on how you bid.
Creative Financing: In today’s market it is going to cost a little more to get an asset in a hot category and finding the right financial mechanism that will secure a transaction, yet still provide a solid ROI for the investment is critical. Consider structures such as earn-outs to provide sellers the valuations they are seeking. Look at adaptive payment terms as well as equity as a means to provide the seller with the walk away or retention dollars they need to proceed with a transaction.
Culture: This is an increasingly important component of a transaction. The challenge of maintaining the culture that the acquired company possessed prior to a combination is key to ensuring long-term success for the human capital that will accompany the acquisition. Think about it this way… it’s likely the culture that drove the innovation, and at the same time, the attractiveness that bolstered the output from the company, so disrupting this will hinder the benefits to the combined entity post-integration. “If it ain’t broke don’t fix it”
Diligence: The grueling phase of due diligence is often where deals fall apart. Especially when the acquirer is a larger and likely more pragmatic organization. Be prepared to look at a more forward-looking outlook of the business when chiseling away at valuations. Look at different scenarios when modeling the combined business and ensure that the proforma of the future takes into consideration the momentum the seller brings to the business and why the market finds them an attractive provider.
Integration: With the transaction complete the real heavy lifting starts. It is for this reason that having a clearly defined integration plan and strategy can be the difference between getting a combined global buy-in on the integration efforts vs the element of surprise or worse yet, lack of a detailed plan. If all parties know what life after signing looks like the likelihood of a timely ROI goes up dramatically.
Operating Model: All too often we hear post combination horror stories about how the acquiring party altered the business model, pricing, and terms that the acquired business had in place. The result was customer frustration, attrition, and ultimately a misfire on the ROI. Allow the business to operate as it did prior to acquisition. It may have a significant reason to do with why the market found them attractive.
In summary, getting deals done in the evolving world of IT Services is getting competitive and you need to think a little more salesy than you traditionally had to. Be flexible, compassionate and respectful to those who created the asset, why it was a success and ultimately how you will maintain that success into the future. At Revenue Rocket we have helped dozens of firms navigate both offers and solicitations to buy over the last 18 months and we have pioneered many of these innovative deal structures, processes and integration plans that has led to a 2X year over year success rate for our clients and their transactions. To learn more about how to be competitive in today’s market, contact us at www.revenuerocket.com/contact-us