Ephor Group creates wealth producing enterprises.
Ephor Corporate Development Best Practices for 2011 and Beyond
One management trend prevalent in 2011 is growth expansion via acquiring a “team” or “book of business” that can add additional leaders, capabilities and portfolio.
Whether it's called a “roll up,” “M&A," or merger; acquisitions can be an effective part of your company strategy for hiring, growth, and succession planning. A targeted acquisition has the potential to be much more economical and resource efficient. For example, buying a new office in Dallas or San Antonio versus the company taking a chance on hiring someone (branch manager or sales person) and opening a new location from scratch.
Acquisition is a management strategy for hiring, revenue growth, portfolio growth and leadership succession strategy because for asset light service, solution providers, and technology companies, they must either grow or shrink. Mitigating financial risk requires scale and scale requires strategies beyond direct selling. Our track-record and analysis of acquisitions has demonstrated that the strategic benefits from acquisitions center around expanding portfolio, through either additional team members and or adding products, services, and solutions.
When is a good time to evaluate an acquisition?
Assuming that the core business is profitable and growing above GDP and inflation (bad businesses should not acquire), then the right time is when you are looking to boost corporate performance and bolster current capabilities. Even acquiring a small < 5 person firm can have the following impact on performance:
Revenue Model: Boost your current portfolio and capabilities.
Ops Model: Strengthen your bench strength. Acquire future leaders.
Financial Model: Create additional scale which mitigates investment risks. Strengthen the company’s profit model by adding additional resources girth to the company.
Whether to boost corporate performance by strengthening the portfolio of products and solutions or to bolster a team’s bench and capabilities, acquiring small can be a great avenue for extending a company's scale and assets.
In our experience, the strategic logic for an acquisition that creates value typically includes the acquiring benefits by strengthening most of the following:
Tie the client to the company through additional solutions/capabilities and team member relationships
Lower the cost of client acquisition; the cost of customer acquisition is too excessive for small business to rely on traditional direct sales methods without augmenting their current efforts.
Pricing: Identify and maturate acquisition targets that are acquisitive to the business model and P&L. Also look for acquisitions that will help command premium prices. Having a proactive acquisition and corporate development strategy lowers the cost of capital.
Market Demand & Competitive Landscape: Removes waste from an industry and/or creates market access for products, skills and technologies.
The majority of acquisitions fail because they incorrectly attempt to fit a singular candidate versus taking an approach that identifies a highly qualified group of targets that are maturated simultaneously. The analogy is powerful: traditional M&A is like the NFL draft: when a coach is looking to "fill a hole / stop a gap" they will pick a player that may or may not add value in the near-term and work out for the long-term. In contrast Bill Belichick’s strategy is to find players that fit the New England Patriot system.
It’s simple math, add people who bring fit into the company's protocols, policies, norms (cultural and organizational DNA) and that also bring their work with them (client revenues) and that have personnel whose expertise leads to greater expansion. Why hire through acquisition? Because labor supply imbalance means for most businesses you can hire “juniors” or “gray hairs” or you can acquire. Only mid-skill level that is cost-effective is through “acquisition” of a team that brings not only a “book of business” but most importantly diversity in skills, capabilities, demographics.
The magic formula to making an acquisition successful is to have a proactive and ongoing acquisition strategy that queues up multiple acquisitions as part of a business growth and expansion strategy. Like any other business process, the adoption of best practices is essential.
Each acquisition deal must provide demonstrable, meaningful value from day one and have its own strategic logic that drives the long-term valuation of the business. In our experience, acquirers in the most successful deals have specific, well-articulated value creation ideas going in. For less successful deals, the connection between people and how well people get along is overly prioritized.
Often, small businesses have difficulty reaching the entire potential market. Small technology companies, for example, typically lack the distribution channels and assets required to cultivate relationships with the many buyers they could potentially service.
Targeted acquisition have the potential to add skills and capabilities faster and at a lower cost than can be built. The importance of pursuing multiple acquisitions cannot be underscored as identifying potentials, following studying and maturating them and then "picking the winners" makes all the difference.
Like all evolutions, it happens in fits and starts, without perfection, but it's clearly happening. As the small business landscape has changed over the past few years (> 70% of US employees worked for small business last decade and only approximately 50% by the end of the decade); clearly something has and is happening that forces leaders to change their business models and strategies, and reengineer their companies.
In 1924, Walt Disney was already in Hollywood and he wanted his old friend Ubbe Iwerks to leave Kansas City and come join him to build an animation studio. The last line of the letter said "PS I wouldn't live in KC now if you gave me the place—yep—you bet—Hooray for Hollywood." And, just above, in larger letters, he scrawled, "Don't hesitate—Do it now!"
Strategy is the intersection of a desired future state and the action(s) designed to achieve the particular goal.
Strategy relies on wisdom, management science, effective forecasting and planning, i.e. “being able to see around the corner” and the efficient marshalling of resources.
How a company grows is a matter of both strategy and tactical execution, but certainly an effective strategy reduces risk, ensures more efficient use of capital and resources, and promises greater rewards. Strategy will rarely be successful without testing and validation.
Ephor delivers strategy validation. And our approach concludes with insourcing the market research intelligence programs so that they become institutionalized internally to our client companies.
With today's economy, it’s more important than ever to validate your growth strategy and align your capabilities and people in real-time to changing market demands, buyer trends, and competition.
Are you satisfied with your strategy?
Do you desire a predictable, forecastable steady stream of clients?
Are you predictably and consistently developing next months and next quarters pipeline
Implementing your strategic vision within the constraints of available capital and resources makes owning and managing a business a real challenge.
Today’s difficult operating environment creates complex challenges to creating exponential growth. The current economic realities place more stress and new constraints on leadership to make the right decisions and adjust their financial models and business dynamics. In this new economic reality, it’s critical that leadership maximize the entire spectrum of opportunities, including those initiatives around launching new products/solutions and M&A / Corporate Development.
Ephor’s approach is designed to validate your strategy through a research based program which simultaneously gathers real-world data, scores responses into probability segments and provides the information via valuable, publishable industry research reports which can be used for additional promotional and opportunity generation efforts.
Companies advance a myriad of growth strategies for creating value with acquisitions—but only a handful are likely to do so.
Read more here about Validating Your Growth and Expansion Strategy.