What Does an Add-On Acquisition Entail?
As a business owner, there are many strategies to grow your company: new product lines or services, cross-selling or up-selling, or geographic expansion, to name a few. Growth via acquisition is another strategy that can result in accelerated growth if executed properly. For many business owners, though, this strategy may seem out of reach given the complexity and time needed to implement it. As a private equity firm, we regularly pursue add-on acquisitions with our partner companies. Below, we share why a company may want to complete an add-on acquisition (or multiple!) and what that process entails.
Why Acquire?
There are benefits to pursuing an add-on acquisition to both the revenue and cost sides of the business. On the revenue side, there can be an instant boost to revenue if the add-on company brings new customers, unlocks new sales channels, adds new products or services to your company, or expands your geographic footprint. For example, a consumer goods company selling products into two channels, such as retail and gas stations, may look to acquire a company that sells products into hospitality channels. The acquiring company now has access to this new channel to sell their own products. Cross-selling or upselling opportunities can also increase revenue. The diversification of revenue is an added boost here, reducing your company’s reliance on historic customers.
In some cases, there may be technical capabilities, patents, or even equipment you want to incorporate into your business that can spur further growth. In one recent add-on acquisition at one of our portfolio companies, while the purchase brought new customers to the company, the main goal of the transaction was to access more equipment needed to unlock capacity. In general, a greater size also means greater power to invest in the business, whether that’s through better negotiating leverage or attracting higher-quality leaders.
From a cost perspective, combining two or more companies can result in overall cost savings for the consolidated business through economies of scale. This can be achieved through merging back-office functions, leveraging internal sales and marketing resources rather than outsourcing, or through more favorable pricing due to improved negotiating position with suppliers.
Where Do I Start?
If you’ve decided that an add-on acquisition could benefit your company, the first step is to define what exactly it is you’re looking to acquire. This includes laying out the goals of the transaction – is your primary purpose to gain more equipment? Or are you looking to add specific customers or channels? What is the target size or geography? Be specific as to what you want to buy and what you don’t want to buy. For example, instead of a broad search for a “manufacturing company in California,” a well-defined search could be “a sheet metal and/or machining shop with less than 20 employees, within three hours of the Bay area, and with exposure to the healthcare industry.”
Once you have a clear idea of what you’re looking for, it’s time to actually find the company you will acquire. There are several ways to lead this search. You may choose to hire an investment bank or broker to identify and reach out to targets. If you have a capital partner, they may have the resources to lead these efforts. You can look at your competitors or others in your supply chain or ecosystem and gauge their interest in a sale. Networking in your industry and asking for referrals can be another way to identify potential opportunities. After you’ve created your target list and actually narrowed down who may be interested, the diligence phase begins.
The diligence for an add-on acquisition is very similar to any kind of business sale diligence, though the scope depends on the size. For example, smaller transactions may not engage a third party to conduct a quality of earnings review. During the due diligence phase, this is your time to really dig in and ask the right questions to understand the business, identify potential concerns, and confirm that the reasons you wanted to acquire the company in the first place are true. Among other areas to focus on, you should be assessing cultural fit of the company with yours, especially if you will be merging employee bases. Ensure that the company’s values and mission fit with yours and have a plan in place to combine these with minimal friction. Part of this is also ensuring you have the right people in the right seats to ease this transition, which can include accounting or technology integration, or making branding decisions.
Whether or not you hire an intermediary to lead the search, you’ll still need some advisors to assist with the transaction to protect your company and interests. The most important of these is a good attorney with M&A experience. Depending on the complexity, you may or may not want to engage a specialized accountant.
What Happens Next?
Post-closing is an exciting time for both your company and the acquired company, but also one that should be navigated with care. The messaging to both groups of employees in particular is important, especially if you were previously competitors. Think about it as “marketing” the acquisition or merger to employees, as well as customers and suppliers, with the goal of reassuring all parties that business will continue as usual (or even better than before). Along with the message, you should have an integration plan in place prior to closing the transaction to ensure nothing falls through the cracks. An important example would be to have all benefit plans set up prior to closing, so that on day one if an employee has an emergency, they are covered.
Beyond the immediate transition, we recommend implementing a 100-day plan after closing. This plan should include consolidating financials and executing on other, operational integration action items. This period can be fragile, so you’ll want to keep a sharp eye to ensure you’re not losing key people or customers and that no administrative tasks are being missed.
An add-on acquisition can be transformative for your company, but it does require thoughtful time and effort on your part to execute successfully. At our firm, we often lead add-on searches and transactions for our portfolio companies, helping to alleviate some of this burden. Reach out to us to learn more about how we might work with your company to execute a growth-via-acquisition strategy.
