We’ve previously discussed how acquiring a business can be one method of increasing the success and profitability of your company. This is especially true when the acquisition extends your company’s reach and service area and its product/service portfolio complements your own. Right now, however, the market has more demand for businesses than supply which means that would-be investors have to both be patient and get creative with their acquisition strategy.
Acquisition Strategy: Finding the Right Opportunities
In a market with plenty of supply, finding a business to purchase is a matter of looking over the readily available options. In a tighter market, investors and private equity firms have to make their own opportunities in order to put their capital to work. One effective strategy in the past was to cold call potential acquisitions to see if they were interested in selling their companies either at that time or down the line at some future date. Cold calling is a lot of work, but some owners will bite, especially if the economy is shaky or there are rumblings about another recession.
In today’s good economy, more owners are choosing to postpone retirement, preferring to ride the wave of prosperity, and gambling they won’t get trapped by an economic slowdown. This means that motivated investors, as a part of their acquisition strategy, have to make themselves look attractive and build trust. This takes time. It can take years.
Acquisition Strategy: Wooing Business Owners
As a way of shaking out what deals may be had, private equity firms are directing their business development professionals to develop long-term relationships with business owners so that when the time comes for those owners to sell, these firms will already be on the owners’ radar. Business developers are not limiting their efforts to cultivating individual deals, though. They are focusing on industry sectors, becoming more knowledgeable about those sectors, how companies in those sectors become profitable, and which businesses are strong performers.
With this knowledge, they target specific companies as attractive prospects for acquisition. Developing this type of deal-sourcing strategy is a long-term proposition. Simply getting on a prospective seller’s short-list often requires developing relationships two to four years in advance of any sale. In this way, they know which companies in their industry are solid investments and appropriately priced. They may also get a heads up before those companies are put on the market if they have built enough trust and rapport.
Still, the current consensus is that business development professionals can expect only limited success with long-term deal sourcing. “The market is already difficult and will likely get more difficult. Everyone wants to make sure there is ample deal flow generation,” says Kelly DePonte, managing director with Probitas Partners. “…if there are 30 deals in the pipeline two to five will come to fruition.”
Given this current market, then, smaller investors looking for good deals need to be patient and to keep their eyes open for what opportunities may come. Their acquisition strategy can no longer be to show up with financing. They need knowledge of the industry they are seeking to invest in. They should also introduce themselves to owners of companies that are strong performers and owners who may be considering retiring or exiting in the next few years.
If you are seeking assistance in building long-term relationships and building your own proprietary pipeline of targeted acquisition prospects, please contact us regarding our buy-side services.