Advancing the growth agenda
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Better balance sheets can equal new growth potential
National leader, Corporate Finance
"M&A is just one tool that you can use to advance your overall corporate strategy."
Private company leaders are feeling positive about future prospects. Stronger balance sheets and easier access to financing mean new opportunities for growth. Are you ready?
It’s a question more and more private company leaders are seriously considering. The fact is, after three years of very slow merger and acquisition (M&A) activity among private companies in Canada, business leaders are feeling more positive about future prospects, have solid balance sheets, access to financing and are looking for new opportunities to grow. In fact, the recent PwC Private Company Services webinar, Getting the deal done: Growing through acquisitions, revealed that a strong Canadian dollar and economic stability led to an all-time record number of Canadian companies acquiring US-based businesses in 2011.
Here at home, healthier economic prospects and improving valuations are expected to lead to increasing numbers of family-owned businesses coming to the market.
Almost 60 percent of the webinar’s participants* are contemplating an acquisition in the next 12 to 24 months. The conditions are certainly right for an acquisition but companies should always be strategic about their M&A activity, says Julian Brown, partner, national leader, corporate finance at PwC.
“M&A is just one tool that you can use to advance your overall corporate strategy. You’re never going to stop business owners and leaders from being opportunistic about acquisitions. Sometimes it works, but if you are buying something that isn’t in line with your overall strategy, it likely won’t help you achieve your long-term goals.”
Key components of an acquisition strategy
- Step back and think about the big picture. Where do you want to be in five years and how can you most effectively get there? At a very high level, this should give you an idea of the goods and services, as well as the markets you want to be involved with. The next step is to consider the avenues open to you to achieve that big picture. For example, which part of the strategy can best be achieved by organic growth, a joint venture, or commercial agreements, which can include anything from product licensing to franchising agreements? When does M&A make the most sense? Are you considering M&A to broaden your geographic presence? To gain product platforms? To access new customers? To acquire intellectual property? It is important not to overlook the fact that this may not just be about growth. It could also require that you divest non-core assets.
- Do the right targets exist? A key factor in determining whether acquisition is the right route in helping you to achieve a given strategic goal is the availability of a suitable target company. Analyze the market and assess the targets that not only will help achieve your strategic goals, but make sense from a size and valuation perspective. “If suitable targets are there, then that’s when an acquisition becomes part of the strategy,” says Brown.
- How are you going to finance an acquisition? If suitable targets exist, then the next factor to consider is whether you can afford to buy them. Companies need to determine what needs to be done to access both fresh equity and debt financing. If there are non-core assets or divisions that can be sold to help finance the acquisition, this could be considered an additional source of financing. Working through the financing part of the strategic plan will also help focus the minds of shareholders. “We often see companies where some shareholders are more aggressive about growth, while others are happy with a regular dividend and status quo. Often in privately held companies, these differences are not really discussed until there is a significant investment decision to be made, such as an acquisition. It is important to flush out these issues at the initial planning stage. If not, it can be very damaging, as well as costly if issues appear part way through the acquisition process,” says Brown.
- Give yourself time. The company you’ve identified may not be for sale. “The earlier you start talking to the owners and putting your stake in the ground, the better,” says Brown. “The deals that add the most value are the ones that are very well planned. When it does come time to acquire, you are already in an established relationship with the owner. You’ll know a lot more about the company, about the shareholder, what they want and will be much more likely to close the deal. Once you set the strategy it’s about maintaining contact with the targets that are part of that strategy.”
- Execution will be key to ensuring you access the full value of the company. A big part of executing well is getting buy-in. “Start with your own company. This will be a lot easier if you involve senior management in setting overall business strategy,” says Brown. “Be upfront, honest and clear with both your internal messaging and your communication with the company you are acquiring. You need to make sure the people who are going to contribute to the full strategic benefits of the acquisition are very much on board, otherwise you will lose a lot of the value you hoped to acquire and risk losing the individuals themselves.”
- Corporate culture is a very important aspect of getting an acquisition right. Make sure people talk to each other, understand the cultural differences and work out a way to create a common culture. This takes time and planning. “There is no right or wrong answer,” says Brown. “It’s very specific to each individual company. The key is to make sure you are thinking about it from the outset.”
- An acquisition has emotional implications—the better you understand the motivations on the other side of the table, the more effective you will be in completing the transaction. “Don’t look at a deal solely from an analytical business perspective. By doing this, you risk overlooking the emotional perspective that can be key to getting the deal across the line. By taking the time to understand the seller’s perspective and goals, you improve your chances of moving forward successfully,” says Brown.
There should only be one reason to make an acquisition and that is to advance your overall strategy and goals for the company. That is the starting point for any effective M&A strategy. From there, you can move through the necessary steps to determine whether M&A is the best option, identify potential targets and ultimately integrate an acquisition, says Brown. “Done right, it can help you get to where you want to be much faster than otherwise possible.”
* 59 individuals responded to the polling question
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Let's Talk is part of our PwC Private Business Exchange program — a dynamic, interactive community of private business owners and executives. To read all articles in the Let's Talk series, please follow the links below:
Plan more, Pay less: Effective tax strategies for your family business
Planning the next move: Successfully transitioning to a professionally-managed business
Succeeding through succession: Using succession planning to build value and talent
Driving growth with your supply chain
Advancing the growth agenda
Making strategic planning real
Connecting With Social Media
A business case for sustainability
A Healthy Family Business
The 21-Year Rule is Taxing on Family Trusts
U.S. Estate Tax Laws: What you need to know
Embracing the Power of the Cloud
Five Steps to a Greener Business
Freezing Your Estate
Maximize Your Tax Savings
Playing the Long Game
Dealing with Your Banker